After-hours trading, also called extended-hours trading, allows investors to buy and sell stock outside of the stock market’s regular business hours. Robinhood is an online brokerage firm that offers premarket trading from 9 a.m. to 9:30 a.m. EST and aftermarket-hours trading between 4 p.m. to 6 p.m. EST. Traders use pre- and post-market periods to take advantage of earnings announcements and what is happening in foreign markets.
Some people don’t have the ability during the day to buy or sell, and these times offer them flexibility. You can place a market order, limit order, stop order stock, good-for-day and good-till-cancel orders to get the desired prices. It allows you to buy or sell before the open and after the close.
What is After-Hours Trading?
After-hours trading is when you can trade premarket before Wall Street formally opens at 9:30 a.m. EST or after it closes at 4 p.m. EST. It occurs through electronic communications networks (ECNs). ECNs start trading at 4 a.m. until 9:30 a.m. EST and start again from 4 p.m. to 8 p.m. EST after the market closes. Each brokerage firm sets its own guidelines to trade premarket after hours.
The pricing is set from the buy and sell orders on the ECN. You will see what’s happening in real time, with larger spreads between the bid (the highest price from buyers) and ask (the lowest prices by sellers) in the last sale. You might not get the price you want, as they reflect matching the orders with available buyers or sellers on the ECN.
Prices are not consolidated across all of the ECNs like they are with the stock exchanges. There are also lower levels of liquidity. These two factors can create pricing disparities between what you see and your execution.
How are After-Hour Trades Completed?
After hour-trades are completed using a matching system of all buy and sell orders. The transaction is entered into the trading queue during the session. It must be matched with the available buy or sell orders to get a fill. The execution can be different with these prices changing on the release of news from the company. These disparities create a situation where the prices can change quickly.
What are the Benefits of After-Hours Trading?
After-hours trading offers the benefits of convenience, capitalizing on the news (such as earnings reports), changes in foreign markets, getting a better price before the open and trading with less volatility. These extended trading hours allow you to see what the stock is doing when you are up early in the morning or home in the evening. You don’t have to wait for the exchange to open to place a trade after hours.
Capitalizing on news allows you to buy or sell on events such as earnings announcements before the Wall Street analysts talk about it the next day. These changes ripple through the foreign markets and can lead to buying or selling opportunities on the news. You may get a better price before the open, when a wave of buy or sell orders is waiting to be processed at the opening bell. The lower levels of volume mean that not as many orders are processed and the volatility can be lower at times.
Types of After-Hours Trading Orders
After-hours trading allows select types of orders to include market, limit, stop, trailing stop, good-for-day and good-till-cancel. A market order is when you want to buy or sell the stock at the prevailing market price. You use a market order when you want to buy or sell a stock immediately.
A limit order allows you to buy or sell at a specific price. Once it reaches the price, the order becomes a market order and it is executed. You use a limit order to ensure you will get a particular buy or sell price.
Stop orders are when the price reaches a specific price and goes beyond it. You use these types of orders to limit your losses if the price of the stock starts to fall.
A trailing stop order allows you to adjust the stop price by a select amount of points or a percentage below the market price. If the stock price keeps moving higher, you can adjust the stop order upward to protect the profit at critical levels such as resistance or support. You use it to protect your profits when there is a breakdown in prices.
Good-for-day is when the order must be executed during that day. If it is not, it is automatically canceled. You use them if you think the stock price is attractive at certain levels for the day. It will be executed or canceled if it does not reach the desired price.
Good-till-cancel orders are open until executed or canceled. They are used to ensure you get your desired price until you decide you no longer want to execute at these levels.
Are There Risks Involved?
Trading after hours does involve risks including shifting liquidity, volatility, inconsistent prices and changes for news-related events. The lower liquidity levels mean there are larger spreads between the bid and the ask prices. You might not get the price you want because of these differences. There are also times when the changing prices lead to partial fills on your order. Some stocks don’t trade after hours, limiting your access to them.
Volatility is higher with the lower volume, leading to more up and down swings. The stock price can overreact to news-related events, giving you poor executions compared to waiting for the regular trading session.
News-related events can cause the price of the stock to over- or underreact to them. You may receive worse executions, with traders becoming overly emotional before or after hours.
Once the markets start trading, reversals can occur, leading to poor executions. These differences make trading after hours riskier compared with the regular session on the exchanges. You need to decide if these risks are worth it and be aware of the potential drawbacks they bring.
Making After-Hours Trading Work for You
After-hours trading offers numerous benefits — convenience, capitalizing on the news (such as earnings reports), changes in overseas markets, getting a better price before the open and trading without as much volatility. You can take advantage of these changes before the markets open to get better executions. The risks are shifting liquidity levels, volatility, inconsistent prices and changes for news-related events.
You need to do your research before trading after hours to determine whether it is right for you. It’s not for everyone, and you must know how it can impact your trading strategies and executions.
Frequently Asked Questions
Who is allowed to trade after hours?
Anyone can trade after hours, but there are restrictions on the time frame and orders for each brokerage firm. You need to find out about their policies and procedures before starting.
Is it bad to trade after hours?
After-hours trading can lead to poor executions from lower trading volumes, volatility and pricing. These disparities create opportunities or highlight emotional trading that can reverse once the exchanges open during the regular session.
Why did Robinhood make staff cuts?
On August 2nd, 2022 Robinhood announced they cut around a quarter (23%) of their staff due to their sixth quarterly loss. This move is a bit of a surprised after laying off 9% of their staff in April of 2021.