What is after-hours trading?

After-hours trading (AHT), or after-market trading, refers to trades executed outside of the working hours of the major markets.

AHT is completed through electronic communication networks (ECNs) – computerised systems that eliminate the need for intermediaries and connect buyers with sellers as well as brokers with traders. They can provide anonymity and remove the geographical barriers limiting investment activities. 

Transactions and trades executed in AHT affect the opening price on the next trading day. The AHT price can cause a gap – either up down – in a stock price. A gap up occurs when the opening price is higher than the previous trading day closing price; a gap down is when the opening price is lower than the previous trading day closing price.

After-hours trading – pros and cons

Trading outside working hours is available to individual and large institutional investors. It gives them a chance to open positions in the market when the exchanges are closed, meaning they have a wider trading window. Also, traders can swiftly reflect any price-sensitive information published outside of the working hours of markets.

The disadvantages of AHT are lower liquidity, lower trading volume available, and higher volatility. Lower liquidity occurs because of a decrease in the number of participants, which can limit the buy-and-sell transactions.

Moreover, prices could be more volatile compared to regular trading hours, and major announcements may have a substantial effect. The spread between the buy and sell price could also be higher than in regular market hours. Hence it would be more difficult for a trader to execute trades at the desired prices. 

Another drawback is that the major AHT players are large institutional investors, with higher amounts of funds and access to more information. And, as AHT is heavily based on technology, lost internet connections or IT problems could result in order delays or traders missing the opportunity to open or close a trading position.