What to Know About After-Hours Trading

Have you ever turned on the news and heard reports of stocks making moves in after-hours trading after a big earnings announcement? Have you wondered what after-hours trading actually is and how it works, and what risks are involved? Here are some answers.

Normal market hours are 9:30 a.m. to 4 p.m. ET. However, there are also sessions before the start of regular trading and again after the close. These two extra sessions are known collectively as extended-hours trading.

During the pre-market session, Schwab clients can trade from 7:00 a.m. ET to 9:25 am ET on Schwab.com or Schwab Mobile or round the clock on thinkorswim platforms by choosing an EXTO order type (see table for details, overnight trading is limited to a select number of securities.

During after-hours trading, Schwab clients can trade from 4:05 p.m. to 8 p.m. ET on Schwab.com or Schwab Mobile or round the clock on thinkorswim platforms by choosing an EXTO order type. 

Extended-hours trading is possible thanks to automated order-matching systems called electronic markets. An electronic market is simply a service that matches up buy and sell orders. For example, if you place an order to buy 200 shares at $45, the system searches for an order to sell at least 200 shares at $45. If it finds one, the trade is done. If not, it won't fill. 

Commissions and settlement times are the same as for the regular session. However, other differences may apply. 

Not all order types are accepted during extended-hours trading. Limit orders to buy, sell, or short are permitted, but stop and stop-limit orders aren't. Nor are orders with special conditions such as fill-or-kill, immediate-or-cancel, or all-or-none. 

In general, extended-hours orders are good only during the designated session, and don’t carry over into any other session.

That said, thinkorswim trading platforms allow you to keep your trades open longer if you define your timeframe as “GTC_EXT,” which means Good Til Canceled, including the Extended Hours. 

Be aware that if you're using a GTC_EXT order with thinly traded securities, multiple executions might be necessary to complete the order. That might not be a concern if you’re trading listed securities—which aren't subject to fees or commissions when placing online orders for U.S. securities—but international and over-the-counter stocks may trigger fees or commissions on a per-execution day basis. 

Extended-hours trading offers two potential advantages:

• Convenience: Some traders' schedules prevent them from placing trades and seeing them fill during the normal session. Extended-hours trading gives them an opportunity to check out the current quotes, place a trade, and potentially even have that order fill outside of regular session hours.
• Ability to react to news events: Many companies report results after the close of the regular session. Extended-hours traders can immediately place trades to manage their positions without having to wait until the next day's open and potentially miss meaningful price swings. 

So, how about the risks?

• Uncertain prices: In the regular session, the quotes you see are consolidated and represent the best available prices across all trading venues. In the extended-hours market, on the other hand, you may see prices from only one venue, and these may not reflect the prices displayed in other electronic trading systems for the same security.
• Lower liquidity: Because fewer shares tend to trade after hours, spreads between the bid (the highest price offered by all buyers) and the ask (the lowest price offered by all sellers) can be wide. Some stocks may simply not trade after hours.
• No index values: Index levels generally aren’t calculated or disseminated for public use after hours, which could pose a challenge for individual investors hoping to trade certain index-tracking products during extended hours. Professional traders may have access to proprietary systems that can quickly calculate index values based on individual stock prices, which might give them an edge over individual traders.

Trading in the extended sessions isn’t for everybody. Those traders who understand both the potential risks and opportunities, however, could find it worthwhile.