Brokerage firms will often allow some accounts to engage in after-hours trading. This is a time period where trades can occur yet the financial markets are closed. For the stock market, this occurs after the close at 4 PM eastern time and lasts until 8 PM.
It was traditionally exclusive to institutional investors and high net-worth individuals. This changed over the last couple decades as more individuals are now able to trade during those hours. The volume is miniscule as compared to the regular trading sessions.
Why Trade After-Hours?
Many wonder why people trade after hours. The volatility is much greater since volume is so much lower. For this reason, it is vital that one be very careful.
Fortunately, during this session only limit orders can be placed. Market orders are not accepted which could really cause issues if stocks are moving wildly.
People trade after hours to take advantage of news that occurs when the markets are closed. One of the biggest trading opportunities is earnings. Since most companies announce after hours, the stock will move based upon what is reported. Those who do not have this ability will have to wait until the exchanges open to trade the stock.
It is easy to see the advantage one might have if the earnings results are much larger than expected. Stocks can often have major moves as the earnings come out and the reports are digested. Also, trading during the earnings calls can be helpful since similar results can be exhibited then.
Depending upon the results, traders can enter or exit the stock long before the general public can make their moves.
Risks
There are risks associated with after hours trading.
As mentioned, volatility is much greater during this time period so one can experience larger losses if one the wrong site of the trade.
Also, since liquidity is much lower, there is a larger spread between the bid-ask.