What is After Market Trading, and How Does it Affect Opening Price

After-market trading occurs when investors trade stocks and bonds on the market after the normal business hours of 9:30 am to 4:00 pm Eastern Time. Until recently, after-market trading was limited to only large trading and reserved for only professionals and certain companies, with individual investors unable to trade after hours. Now, however, trading after-hours can be done by anyone.

In order to trade after market, one must have access to an electronic communication network, or ECN. These ECNs operate after hours and are affiliated with online brokerage firms, such as etrade or scottrade.

There are a certain number of ramifications that go along with buying and trading after hours. One of the main effects of trading after-hours is the impact it has on stocks the next day. Oftentimes, the activity of buying and selling during after hours trading can either lower or raise the stock's opening price the next day. These price fluctuations are especially true for stocks that have limited trading activities. In addition, the prices of certain stocks during after-market trading are generally not reflective of the stocks' regular prices for a number of reasons. This can be at the end of the trading hours or at the opening of regular trading the next business day.

The trading that occurs after-market is not part of the closing prices that are typically reported. Instead, after-market trading is reported separately on professional data systems rather than the newspaper or on a ticker across the bottom of a TV screen. Investors can go to bed thinking that the price reported at the close of the market is what it will be the next morning, but because of after-market trading, the price could drop or rise significantly over night.

Some investors feel like they might be getting a bargain with after-hours trading. However, this is rarely the case. After-market trading is not recommended for amateur investors for a number of other reasons, including:

• Higher costs. A number of factors, including lack of liquidity, which is the ability to convert stock into cash, and price swings can contribute to a stock's higher price during the after-market trading period. A lack of liquidity results from a lowered number of buyers and sellers, so there is less trading volume for certain stocks, if they are even being traded at all.


• Limited access. Most ECNs only accept limit orders for after hours trading, which means the investor specifies a certain price and if a match is found, the ECN sells or buys the stock. While this may be safer, many investors prefer to place market orders, which are simply stating you want to buy or sell a stock.


• Technical difficulties. An ECN relies on online trading, which means investors are subject to any manner of technical troubles with regards to computers and internet service. In some cases with after-market trading, the investor's order is routed from the brokerage firm to an electronic trading system. If there is a computer or internet problem at the brokerage firm, this may delay or even prevent your order from reaching the system.

Each brokerage firm handles after-market trading differently. As a general rule, it's a risky move at best. Because of the activity that occurs after hours, price fluctuations can occur when the stock market opens the next day.