Day trading is a style of trading in which some traders specialize. After-hours trading refers primarily to the time of trading; it draws a large number of participants, but no trader specializes in after-hours trading. Some day traders may occasionally participate in after-hours trading, but their participation and impact are usually limited.
After-Hours Trading
After-hours trading takes place after the regular market closes at 4 p.m. Eastern time. After-hours trading allows traders to respond to company news released after market close. Some news -- such as earnings surprises or major business announcements -- may have a strong influence on a stock price the following day. These surprises may cause a stock to gap up or down -- that is, to open at a price significantly higher or lower than the closing price the previous day. For example: XYZ stock closes at $20. After the market closes, the company announces the loss of a major customer, and the stock opens for trading at $15 the following day, with no trades in between. If an investor believes that a gap down is likely, he may try to sell XYZ after-hours, before the stock opens for trading the following day, in an attempt to get a better price.
After-Hours Trading Rules and Specifics
Only limit buy and sell orders are accepted during after-hours trading. If a seller cannot find a buyer at a specified price, she may have to lower the limit price or risk not having her order filled. The volume of after-hours trading typically is much lower than the volume of trading during regular hours, and many stocks trade after-hours only occasionally, in response to specific developments. After-hours prices may also have wide swings and be subject to trader manipulation.
Day Trading
Day trading is the buying and selling of stocks on the same day. Day traders try to profit from small daily price fluctuations and often buy and sell the same stocks several times a day, but generally they try to stay completely in cash overnight to avoid after-hours surprises.
Participation
Long-term investors and large institutions may decide to trade after-hours in specific stocks in response to news, ahead of the next day regular trading. Short-term traders may trade after-hours to position themselves for the following day, but because day traders close out their positions at the end of each day and only trade the most liquid stocks they can buy and sell instantaneously, their participation in after-hours trading is limited.
