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There's so much interest in securities trading that major exchange officials long ago determined that extra "after-hours" trading was needed - and the idea has taken flight ever since.

What Is After-Hours Trading?

In technical speak, after-hours trading is defined as the trading of financial securities after the standard exchange trading hours (that's 9:30 a.m. to 4 p.m. EST in the U.S. for the New York Stock Exchange and for NASADQ.)

Technology is driving after-hours trading, as buyers and sellers don't really need an exchange to trade stocks. Millions do so via digital-based after-hours trading via electronic communication networks (ECN) that match up buyers and sellers and help execute trades.

Securities-wise, the major difference with standard day trading and after-hours trading is that stocks and exchange-traded funds trade regularly (but not as much as during the day) after hours, but more exotic financial instruments like equity option puts and calls trade significantly less widely. That's because demand for after-hours trading in the options market just isn't that extensive.

Additionally, more complex futures and currency contracts don't need an after-hours trading session - there is enough demand that can keep those contracts trading on a 24-hour basis.

It's also worth mentioning that after-hours trading and early morning trading, while often bundled together as "extended trading sessions" aren't the same, as one starts before traditional market trading and the other begins after standard trading sessions end.

There are good reasons to trade securities after hours - if you know what you're doing.

For example, the convenience factor is highly useful to busy investors who can focus better on securities trading at night. Night-time trading gives investors the freedom, timetable-wise, to make good trading decisions.

Additionally, trading after hours allows investors to react to news events that impact the price of stocks and funds and generate trades to take advantage of, or deploy a defensive strategy in response to market news.

Limits on After-Hours Trading

While after-hours trading does allow for standard exchange buy and sell orders, trading levels can be so thin that market makers have had to adjust the rules for after-hours trading.

While any investor willing to pay, say, $100 for 10 shares of XYZ stock can execute a trade as long as there is a seller of XYZ stock willing to take the deal, there are variables involved that standard session buyers and sellers don't have to deal with.

For example, if the above XYZ trade can't be completed due to the absence of a seller at $100 per share, the transaction order will be canceled and likely held over for the next day's standard trading session.

Additionally, the weaker volume demand has led market makers and brokers to reset their trading mandates. Some stock orders, for example, can't be completed via traditional stock buy and sell orders. Instead, they can only be transacted via stock limit orders, which have their own set of trading rules (i.e., they must be transacted at a fixed share price.

A Brief History of After-Hours Trading

The seeds planted for after-hours trading were planted in the mid-1980s, when several select U.S.-based equity options and currency exchanges opened up for post-trading session activity.

After-hours trading really began to take off in the 1990s, when the New York Stock Exchange green-lit institutional trading after 4 p.m. (to 5:15 p.m.) in June 1991.

As ECN-based trading platforms began to emerge around the same time, the NYSE and other major financial trading exchanges extended their after-hours trading, ultimately arriving at the 4 p.m. to 8 p.m. trading hours that are prevalent today.

Risks Associated with After Hours Trading

As advances in technology make digital trading easier, after-hours trading has become more common.

That doesn't mean after-hours trading is risk-free. In fact, the U.S. Security Exchange Commission has warned investors to be aware of the risks of trading securities after hours.

Specifically, the SEC has issued the following alerts to average investors considering after-hours trading:

1. Trade Order Handling

You may not always get access to the best possible displayed price on a trade when buying and selling stocks and funds after hours. It's highly advisable to contact your broker or trade execution team and ask how trades are handled after hours. The goal is to make sure your trade is steered to the best available price.

2. Lack of Liquidity

In after-hours trading, there's also the risk of weak liquidity (meaning there aren't enough buyers and sellers available to get a good price on a trade.) That's not the case in regular trading hours, when the market is full of buyers and sellers and there are plenty of trading partners, thus increasing the chances of getting your preferred trade price.

As the SEC points out, with lower trading liquidity, Main Street investors run the risk of higher trading costs, higher uncertainty about prevailing security prices, and experiencing problems executing trades.

3. Wider Trade Quote Spreads

In after-hours trading, the lack of securities traded and lower demand for trading can lead to larger quote spreads (the difference between the bid and ask price on a stock.) That leads to lower odds of getting your buy or sell order executed and not getting the trade price you expected on the transaction, compared to standard trading hours.

4. Trade Pricing Volatility

It's simple Wall Street math, but the fewer securities available to trade after hours translates into more dramatic price fluctuations relative to securities traded in traditional day-time trading sessions. In fact, investors looking to trade securities after hours can depend on trading prices being significantly different than during regular trading hours, mostly due to high volatility.

5. Limit Orders Only

As noted above, brokerage companies only allow limit orders to be executed after hours - at the limit price or better, as the SEC puts it. This scenario isn't necessarily a huge trading risk, but after-hours investors should understand that if the price drifts away from the limit order, that trade will be taken off the table and not be transacted.

Another word of caution. If an after-hours trade remains unexecuted overnight, the investor should check with the brokerage firm and see if it will be automatically executed the next trading day, when the markets re-opened for business.

6. You're Up Against Experienced Traders

In the after-hours market, regular Main Street investors are competing against skilled, better-informed and professional traders. As the adage goes, buyer (and seller) beware when going up against professional traders.

Is After-Hours Trading Right for You?

While after-hours trading is open for any investor to trade, that doesn't mean it's a good idea if you're a buy-and-hold, long-term investor, and can't afford to take excessive risks with their investment portfolios.

If you do go ahead and decide to trade in after-hours trading, first make sure to clear that securities trading in a post-market environment is okay with your trading platform. It's also highly advisable to check with your broker or trading platform and ask about any special rules and regulations that could apply to your trading practices when trading after hours.

When you do start trading after the regular exchange sessions are over, begin with small trades in small cash allotments and examine the lay of the land for a few weeks before diving in any further.

Above all else, consult with a skilled financial adviser, broker or other investment specialist and go over the potential risks and rewards that come with after-hours trading.

The fact is, the best way to go into an after-hours trading experience is with your eyes wide open and with both hands on your wallet. The risks involved are abundant relative to the benefits of trading after hours and the sooner investors realized that - the better.

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