In the context of economics, the after-hours market refers to the trading that takes place outside the official trading hours of the major stock exchanges, such as the New York Stock Exchange (NYSE) or the NASDAQ. This allows trading investors to buy and sell securities outside the standard trading times, typically in response to the new information or events that occur after the market is closed.
Let us imagine that the official trading hours of the stock market are like the main hours when the shop is open. The after-hours market is like a situation where the investors can shop even when the market is officially closed for the day. The investors will still be able to make the deals of buy and sell, but it is like shopping with very few people and the lights are dimmed. This is very useful when the investors want to react very quickly to the news or events that happen after regular market hours.
The after-hours market is a very important aspect of financial economics where the study of market efficiency and investor behaviours is undertaken. It provides insights into how information is processed in financial markets and how the prices are adjusted to the new information. Economists and financial analysts observe the after-hours trading to understand investor reactions to the earnings announcements, economic reports, or other significant events that happen after the regular market hours.
For example, if a company announces its quarterly earnings after the market has closed, and the report exceeds expectations, its stock might have a higher demand and can start trading at a higher price in the after-hours market. In the same manner, in case of major geopolitical events after the market closes, investors might start selling or buying certain stocks in the after-hours market, which affects their prices before the market officially opens the next day.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy