The stocks of major U.S. corporations are typically traded on stock exchanges such as the New York Stock Exchange (NYSE). The hours when trades may be made on the floor of the exchange are dictated by the exchange. The NYSE is traditionally open from 9:30 am to 4:00 pm, Monday through Friday. The emergence of electronic communications networks has made it possible for investors to trade stocks around the clock.
Double Auction Market
Stocks typically trade in a double auction market, with both a bid and an ask price. The buyer offers to purchase a specific number of shares of stock for a specific price, which may be at market value. This is the bid price of the stock. The seller offers to sell a specific number of shares of stock for a specified price. This is the ask price of the stock. If the price the buyer is willing to pay for the stock is the same as the price a seller is willing to sell for, a trade is made. The amount for the transaction that is agreed on is the sales price of the stock. Buy and sell orders that are entered during normal business hours may be executed that day. Orders that are entered after the close of the exchange may be held until the following day.
Prior to the rise of high-speed electronic data communications, U.S.-based individual investors were limited primarily to the stocks of companies that were traded on U.S. stock exchanges or through the over-the-counter (OTC) market. Technological advances in communications have made it possible for individual investors to access information regarding the price of stocks on major stock exchanges from around the world. Some brokerage firms allow individual investors to designated a stock exchange they wish to use to execute a buy or sell order. This provides investors with the opportunity to trade stocks after hours on exchanges in other parts of the world, while exchanges in the U.S. are closed.
Electronic Communications Networks
Some investment brokerage firms offer their clients access to their electronic communications network (ECN). These networks can connect buyers with sellers during times when traditional markets are closed. After-hours stock trades are then handled in much the same way as trades made during regular business hours. ECNs are more commonly used by institutional investors, but they may also be used by individual investors.
There are a number of risks associated with after-hours stock trading that make this type of investing unsuitable for risk-averse investors. The number of buyers and sellers involved with after-hours investing is limited, which may produce larger spreads between bid and asked prices and more volatile stock prices than during regular hours. Limited participants may mean your orders are not executed, and your order may not carry over into the next day's trading. You may be able to lessen your risk by placing limit orders rather than market orders during after-hours trading. All investments in the stock market, whether handled during or after regular business hours, involve risk. You may lose some or all of your investment. Past performance of any investment is never a guarantee of future results.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.