Most investors know that stocks trade during market hours, a trading session that transpires between 9:30 a.m. and 4 p.m. Eastern time in the United States. Stocks also trade in between those times in a session known as after hours trading, which allows investors to capitalize on company news announced early or late in the day.

Identification

In the U.S., after hours trading occurs once trading in major stock exchanges, including the New York Stock Exchange (NYSE) and Nasdaq, has closed for the day. Stocks are bought and sold after hours via electronic communication networks (ECNs). An ECN automatically matches buyers with sellers over an electronic system.

History

Until 1999, after hours trading was limited to large institutional investors, which buy and sell stocks in big block trades. By 2003, the role of ECNs was expanded in the U.S. and individual investors were granted access to the after hours markets.

Features

After hours trading is based on the closing price of a security during normal market hours. After hours trading for Nasdaq-listed stocks is from 4 to 6:30, while for NYSE-listed stocks hours run through 8 p.m. ET. Investors must still rely on a broker to facilitate trades after market hours, and individual broker services vary. If an ECN cannot match a buyer with a seller, an order is placed on hold until both parties to a trade are available.

Considerations

The after hours markets are considered more risky than a regular trading session in part because they are less active. There is less liquidity, which means it's more difficult to match a buyer with a seller. After market stock prices can be difficult to obtain, and, as a result, investors might not always receive the best price for a stock.

Benefits

There are opportunities presented in the after hours markets that are not available during a regular trading session. Sometimes a company's management team will wait until after market hours to announce a major event to avoid volatility in a stock. Were it not for after-hours trading, individual investors would not be able to immediately profit on post-market news.

Expert Insight

After hours trading allows attentive investors to mitigate losses and amplify gains in the stock market, according to BusinessWeek. This is because investors do not have to wait until regular market hours to respond to news.

Source:

Business Week: The Market's Closed -- Wake Up

More Information:

SEC: After Hours Trading: Understanding the Risks

The Motley Fool: After-Hours Trading