Even though the Wall Street trading floors are only open from 9:30 a.m. to 4 p.m. Eastern Time, electronic markets allow you to buy and sell even later. If you can find a seller, you can buy at any hour of the day. When you want to turn around and sell, there's nothing to stop you as long as you've got a willing buyer.
You are perfectly within your legal rights to buy after hours and sell the next morning. All this requires is a willing buyer and a brokerage firm to help you make your trades.
After-Hours Trading Basics
When the regular stock markets close, the electronic ones open. If you have an account with a brokerage firm that has access to the after-hours electronic communications networks, you can keep trading. ECNs include Island, Market XT, Archipelago and Instinet. Most brokerage firms charge the same fees for after-hours trades as they do for other trades. As soon as your after-hours purchase goes through – which is as soon as a seller is willing to part with their shares for your price – you're allowed to sell whenever you want.
Identifying Some Risks
When you're trading after-hours, the market for some stocks isn't as active as it is during the day. This can result in a larger splits between the bid and "ask" prices. The bid price is the price closest to the last trade that potential buyers are willing to pay, while the ask price is the price closest to the last trade that potential sellers are willing to accept.
In some cases, there might not be sellers for the stocks that you want to buy or buyers for the stocks you want to sell, so completing a trade can take longer than usual. The Securities and Exchange Commission also cautions that "many of the after-hours traders are professional traders" who have access to more information than the average investor. With that in mind, casual investors may find that after-hours trading offers more risks than it does rewards.
Understanding Limit Orders
According to the SEC, "many brokerage firms currently accept only limit orders" during after-hours trading to protect against volatile prices. A limit order sets the maximum price you'll pay if you're buying or the minimum price you'll accept if you're selling; otherwise the trade won't go through.
For example, if you make a buy order for 100 shares and put a limit of $45, the order won't go through if the price is higher than $45. That way, you're protected in case the stock price changes drastically.
Other Important Tax Considerations
If you buy one night and sell the next morning, any gains you earn from the transactions count as short-term capital gains. As a result, the profits are taxed at the higher income tax rates. If you were to hold the stock for more than a year, you would pay the lower long-term capital gains rates on your profits. As of 2019, the highest ordinary income tax bracket is 37 percent, while the maximum capital gains rate is 20 percent.
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