If the markets are closed… how do we know what the stock is worth at that moment on the market?
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Because trading continues 24hrs a day.
Think of it like an old flea market, or auction where people are bidding on items. The bids determine the after hours pricing same as the bids during market hours. The price is determined by the most recent sale, or average bid.
There is however, less liquidity (less amount of trading happening) after hours because few platforms allow for after hours trading so for that reason, bidding slows down, and the difference between traders’ bid and ask tends to spread out too. A better metaphor is the trading room at a busy convention such as ComiCon. Imagine a huge room with collectors trading. Now imagine that same room the last day of the convention when almost no one is left but a few diehard fans and stragglers who arrived last minute, maybe just 10 or 20 people in a room that usually has 300+, that’s “after hours” and so you might not get the same deal on your Charizard that you would have when it was “trading hours”.
Ironically, the opposite is also true, something can increase a good amount (instead of losing value) if only one person has it in a room and he feels it’s in demand. Since he knows the competition is few, he can ask higher, like a scalper does with concert tickets.
(After hours trading on the day an option expires can affect option execution too, but that’s a whole other discussion.)
Stock markets work by matching an incoming volume of buy vs sell orders for a stock in real time, and the price of the last sale is how much the stock is worth.
However, there’s nothing about the general process of buying and selling that requires a market. If I have a share of some stock, and you want it, we can simply agree on a price and do the transaction without involving anyone else.
So, for after hours trading, brokerages use secondary networks (ECNs) that are outside of stock exchanges to trade among themselves. Because there’s no fixed price, you always have to place a limit order (“buy me 100 shares at $20” or “sell these shares at $50”). The ECN will only be able to execute the trade if someone else on the network has a corresponding limit order that you can match with.
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