Will I Get Burned in Extended-Hours Trading?

Editor's Note: Ask TheStreet is designed to answer questions about the market, terms, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment- or stock-related advice.

---

What does the term "extended hours" mean? I have noticed it on several stocks I have, and it is different than the closing price. How does it affect the stocks, and how does it work? I thought when the market closed for the day that was it until the following day's trading. -- R

Many investors have probably noticed -- via Yahoo! Finance or a similar site for stock quotes -- that a stock's price moves not only during the normal 9:30 a.m.- to-4 p.m. trading day but also before the open and after the close each day.

This is what is referred to as extended-hours trading, a practice that has become more common with the rise of ECNs (electronic communications networks), which directly match up buyers and sellers of particular stocks. Many brokerages such as E*Trade allow their customers access to these ECNs, provided they fill out a special trading agreement and are willing to pay an additional, per-share ECN fee.

The after-hours market exists because, well, some institutions and individuals want to be able to make a trade beyond the limits of the normal trading day. And in the world of finance, where there's demand for a product, someone will come up with that product. However, the majority of investors (especially beginners) should stay away from extended-hours trading because of the higher risks and extra fees.

Beware of Thin Volume

There are a number of characteristics that set apart extended-hours trading from the normal trading day. The volume in the extended-hours market for a particular stock usually will be most busy immediately before and after the company's earnings announcement, which typically happens when the regular market isn't open. However, even when busy, the volume and liquidity in the extended-hours market is extremely thin compared with an average daytime trading session.