Does After-Hours Trading Affect Stock Prices?

After-hours trading refers to trading in stocks and exchange-traded funds (ETFs) that occurs after the regular market closes. It allows investors to buy and sell securities outside of normal trading hours for a variety of purposes, including responding to news or data releases that occur after the close.

Trades in the after-hours session are completed through electronic communication networks (ECNs) that match potential buyers and sellers without using a traditional stock exchange. These platforms tend to be less liquid than full exchange trading, leading to more volatility and larger price moves on lower trading volume. This presents both opportunities and risks, which we discuss below.

How After-Hours Trading Works

Most investors know that the major stock exchanges have standard trading hours—set periods each day when trading occurs through the exchange. The New York Stock Exchange (NYSE) and Nasdaq in the United States trade regularly from 9:30 a.m. to 4 p.m. Eastern time, with the first trade in the morning creating the opening price for a stock and the final trade at 4 p.m. providing the day’s closing price. But trading also occurs outside of those times.

Trading outside regular hours has been around for a long time, but it was once only the domain of high-net-worth investors (HNWIs) and institutional investors like mutual funds. However, the emergence of ECNs has enabled individual investors to participate in after-hours trading. Financial Industry Regulatory Authority (FINRA) members can voluntarily enter quotations during after-hours sessions, but they are required to comply with all applicable limit order protection and display rules (the Manning Rule and the U.S. Securities and Exchange Commission (SEC) order-handling rules).

The 3 Stock Trading Sessions

There are actually three markets in which shares can be traded Monday through Friday:

• The pre-market trades from 4 a.m. to 9:30 a.m. ET.
• The regular market trades from 9:30 a.m. to 4 p.m. ET. 
• The after-hours market trades from 4 p.m. to 8 p.m. ET.

The pre- and after-hours markets function in the same fashion as the regular market in that the shares are traded between parties at an agreed-upon price. In other words, the price you will receive is the price that someone in the after-hours market or pre-market is willing to pay.

Access to ECNs for After-Hours Trading

In the past, the average investor could only trade shares during regular market hours; after-hours trading was reserved for institutional investors. However, today’s markets are more open than ever, and individuals are free to trade in the extended-hours sessions aided by the proliferation of the internet and ECNs. This has been a step toward a situation in which stock traders are able to make trades 24 hours per day. In 2018, TD Ameritrade adapted its platform to allow for 24-hour trading of certain exchange-traded funds (ETFs), another step in this direction.

Investors can only place limit orders (and not market orders) to buy or sell shares in the after-hours market. The ECN then matches these orders based on the prices set in the limit orders. The use of limit orders reduces the risk of getting “filled” at an undesirable price, which is an important consideration in the after-hours market due to lower trading volumes and hence relatively wide bid-ask spreads. The flip side is that investors may not get their orders executed at all if the stock does not trade at the price specified in the limit order.

Illiquidity: The Risks of After-Hours Trading

Because there are fewer participants than there are during regular trading hours, pre- and after-hours markets will generally have less liquidity, more volatility, and lower volume. This relative illiquidity can have a substantial impact on the price that a buyer or seller ends up receiving for their shares, so it is standard practice to use a limit order on any shares bought or sold outside normal trading hours.

Typically, price changes in the after-hours market have the same effect on a stock that changes in the regular market do: A $1 increase in the after-hours market is the same as a $1 increase in the regular market. Therefore, if you have a stock that falls from $10 (your purchase price) to $9 during the regular day’s trading session, but it then rises by $1.50 to trade at $10.50 in the after-hours market, you will have experienced a $1 loss during the day’s session (from $10 to $9), but because prices rose $1.50 in after-hours trading, you would be sitting on a $0.50-per-share gain.

However, when the regular market opens for the next day’s trading (when most individual investors will have the opportunity to buy or sell), the stock may not necessarily open at the same price at which it traded in the after-hours market.

For example, if a company releases a solid quarterly earnings report after market close, its stock price may increase in the after-hours market. But when institutional and retail investors have parsed through the details of the earnings report, they may discover that the company’s performance was not as impressive as it first appeared. As a result, sell orders may outnumber buy orders at market open, and this selling pressure may cause the stock to open at a price well below the level at which it traded in the previous day’s close or its after-hours market.

The Bottom Line

While normal market hours end at 4 p.m. EST, stocks can and do continue to trade. Participating in after-hours markets can benefit investors and traders who want to trade on news like earnings releases that are announced after the close.

However, the risks of engaging in after-hours trading can be significant. This is because these markets tend to be less liquid and can experience large price moves on relatively low volume. Anyone participating in after-hours market activity should be mindful of these risks.