Does After-Hours Trading Affect Stock Prices?

After-hours trading refers to trading that occurs after the market closes. It allows investors to buy and sell securities outside of regular trading hours. 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.

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 the Nasdaq Stock Market in the United States trade regularly from 9:30 a.m. to 4 p.m. ET, 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 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:

• The premarket 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 that you will receive is the price that someone in the after-hours market or premarket is willing to pay.

Stock Pricing Differences During Extended Hours Trading

Since there are fewer participants than during regular trading hours, pre- and after-hours markets will generally have less liquidity, more volatility, and lower volume. This can have a substantial effect on the price that a buyer or seller ends up receiving for their shares, so it is wise 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 as changes in the regular market: A one-dollar increase in the after-hours market is the same as a one-dollar 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, once 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 once 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 price changes seen in the after-hours market are useful for showing how the market reacts to new information released after the regular market has closed. However, after-hours price changes are more volatile than regular-hours prices, so they should not be relied on as an accurate reflection of where a stock will trade when the next regular session opens.

ECNs and 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. The day when stock investors will be able to trade 24 hours a day, seven days a week may not be too far away.

Investors can only use limit orders, 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.

The Bottom Line

While participating in after-hours markets can benefit investors and traders, the risks are significant. Anyone participating in after-hours market activity should be mindful of these risks.