Should You Be Buying Stocks After Hours?

After decades of innovation and technological advances in financial markets, investments that were once out of reach are now available to everyone with an internet connection and a bank account. We can invest in private companies through Regulation CF and Regulation A+ funding rounds. We can trade options contracts on the CBOE from the comfort of our armchair. We can even “YOLO” into meme stocks with a tap of our cellphones.

And we can access stocks after markets close and before they open for the day’s trading. It’s called extended-hours trading, pre-market trading, post-market trading, or, after-hours trading.

And if you’ve ever wondered how the big moves in stock prices often happen when markets aren't even open… Well, then you’ve already been somewhat exposed to the dynamic of extended-hours trading in action.

But just because we can do something doesn’t necessarily mean we should do it.

So, since they’ve been gaining a lot of popularity with the retail traders I talk to, today let’s dive into stocks after hours and learn a little bit about both the rewards and the potential risks you could run into out there…

Exactly What Hours Are You Trading Stocks “After Hours”?

Obviously, before we get into the risks and rewards, we’ve got to devote a little time to the basics of trading stocks after hours: what it is, how it works, who can do it, etc. So let’s jump right in and then we can get to the more interesting part of this discussion.

Trading stocks after hours refers to the practice of buying and selling stocks outside of standard trading hours. Like I said earlier, the extended trading period consists of two separate sessions: pre-market and after-hours.

Pre-market trading generally starts as early as 4:00 a.m. Eastern Time and continues until the market officially opens at 9:30 a.m. And after-hours trading typically runs from 4:00 p.m. to 8:00 p.m. Eastern Time, long after the market officially closes for the day.

Trades during these extended sessions are executed via electronic communication networks (ECNs), which digitally connect buyers and sellers.

While major exchanges like Nasdaq and NYSE set standard times, individual brokerage firms have their own specific rules and time frames for extended-hours trading.

For example, Wells Fargo's after-hours session runs from 4:01 p.m. to 6:30 p.m., while Charles Schwab provides trading from 4:05 p.m. to 8:00 p.m.

Understanding your brokerage's specific hours is crucial before you begin trading stocks after hours. It’s also crucial to understand what restrictions your broker puts on stocks after hours…

Typically trading stocks after hours requires specific brokerage support. And not every brokerage firm offers this capability, so the first step is confirming that your broker supports extended trading sessions.

Once confirmed, you'll typically conduct trades through your brokerage's online trading platform. But unlike during regular market hours, extended-hours trading usually restricts the types of orders you can place.

Limit orders — orders executed only at your specified price or better — are commonly required during these sessions. This contrasts significantly with regular hours trading, where various order types like market orders, stop orders, and fill-or-kill orders are readily available.

Additionally, extended-hours orders generally expire at the end of the session if not filled, meaning traders must place new orders for subsequent trading sessions. Again, this is a big difference to regular hours where you can place good-until-canceled (GTC) orders.

The Benefits of Trading Stocks After Hours

So, now that we’ve got a handle on the hours that constitute after hours and the requirements for trading stocks after hours, we can finally get into some of the more interesting stuff, like the benefits of trading stocks after hours.

Which is good because trading stocks after hours presents several distinct advantages.

The biggest of those is definitely the ability to promptly react to breaking news or significant corporate announcements, such as earnings releases or key management changes, which often occur outside regular market hours.

Immediate responses to such news can yield advantageous buying or selling opportunities before the broader market has a chance to react during regular hours. And a lot of the time, those big moves you’ve seen after markets are closed and before they’ve opened are reactions to news events like those.

On top of that ability to react quickly, trading stocks after hours provides unparalleled convenience and flexibility, especially for folks who are just unable to trade during standard market hours due to work or other commitments.

And if you’re a more experienced trader, the inherent volatility during these sessions can also offer profitable opportunities through well-timed trades, leveraging price swings that are more pronounced than those you’re likely to see during standard trading windows.

The Limitations of Trading Stocks After Hours

Now, while trading stocks after hours does have some advantages, there are also some limitations of extended hours trading you need to be aware of…

The biggest of which is liquidity. Extended-hours sessions have a lot fewer market participants, which results in far lower trading volumes. Reduced liquidity can make it a ton harder to buy or sell shares at your desired price, potentially resulting in unfilled orders.

Additionally, because after-hours sessions restrict traders mainly to limit orders, executing trades becomes more challenging compared with the regular trading period where broader order types and greater flexibility exist.

The limited market depth (not as many traders trading) during extended hours also means that price quotes can be less reliable, possibly not reflecting true market sentiment and complicating your decision-making even further.

The Risks of Trading Stocks After Hours

The reason I say it’s important to understand those limitations is because they lead to risks that, depending on your risk tolerance, might just outweigh those benefits we discussed earlier…

We already talked about liquidity limitations impacting stocks after hours. And the biggest risk you face trading stocks after hours stems from that limitation. It’s the increased volatility arising from lower liquidity…

With fewer traders actively participating, small trade volumes can significantly influence stock prices, causing exaggerated price swings that might not accurately reflect broader market perceptions.

Another major risk factor is wider bid-ask spreads, and it’s also a product of that low liquidity you find in stocks after hours.

The reduced liquidity during after-hours trading typically results in larger spreads between buyers' bid prices and sellers' ask prices, increasing the potential for traders to execute trades at less favorable prices than expected.

What’s more is that price discrepancies between after-hours sessions and regular market sessions are incredibly common, meaning that stock prices could significantly shift once regular trading resumes, causing unexpected outcomes.

And on top of all of that, after-hours trading is often dominated by institutional investors and professional traders who generally have better tools, greater financial resources, and faster access to news and market developments.

This competitive environment can place retail traders at a severe disadvantage. So if you’re going to trade stocks after hours, you better realize who you’re trading with. And you’d better have a solid strategy and risk management approach.

The Bottom Line on Trading Stocks After Hours

Trading stocks after hours undoubtedly offers exciting possibilities for traders who understand its unique environment and are prepared to manage its risks.

It allows timely responses to critical news and flexible trading schedules, providing valuable opportunities not available during regular market hours.

That being said, given the substantial risks involved, including increased volatility, reduced liquidity, wider bid-ask spreads, and the competitive advantage enjoyed by professional traders, this type of trading is not suitable for everyone, particularly folks with little experience trading stocks.

So if you’re thinking about starting to trade stocks after hours, as with any trading strategy, careful preparation, thorough understanding of your brokerage's policies, disciplined risk management, and cautious initial exposure are going to be essential to maximize your profit potential.

But whether you choose to trade during standard market hours or venture into the world of stocks after hours, staying informed and strategically positioned is vital. And here at Wealth Daily, we strive to provide the essential tools, resources, and expert insights to guide your investing decisions effectively, helping you navigate complexities and optimize your investment outcomes.

So, be it during market hours, before market hours, or after market hours, keep coming back to stay informed and on top of the most profitable trends in the financial markets.