Extended trading (or electronic trading hours) is trading conducted by electronic networks either before or after the trading day of a stock exchange, i.e., pre-market trading or after-hours trading. It tends to be limited in volume than regular trading hours when the exchange is open.
Pre-market stock trading in the U.S. usually runs between 4:00 a.m. and 9:30 a.m. ET, and after-hours trading typically occurs from 4:00 p.m. to 8:00 p.m. ET.
Extended trading (or electronic trading hours) is trading conducted by electronic networks either before or after the trading day of a stock exchange, i.e., pre-market trading or after-hours trading.
Though extended trading is often characterized by highly volatile stock prices, traders can benefit from appealing stock prices during off-peak hours.
During regular trading hours, buyers and sellers of most stocks can trade readily with one another. However, during extended hours, there may be less trading volume for some stocks, making it more difficult for buyers and sellers to execute some of their trades.
Understanding Extended Trading Hours
The emergence of ECNs (Electronic Communication Networks) is helping expand access to extended hours trading, making it possible for retail investors to place trades outside of regular exchange hours. Extended trading allows investors to act quickly on news and events that occur when the exchange is closed, helping them predict the open market direction.
If a major event occurs before the exchange opens, or after the exchange closes, there can be significant extended trading volume. Although, on most days, the trading volume is lower in the extended hours than during the hours the exchange is open. However, some stocks and exchange-traded funds (ETFs) do significant volume in the extended hours.
The U.S. options and futures markets tend to follow different trading hours, depending on the underlying assets, while the forex market operates 24 hours per day.
Benefits of After Hours Trading
Extended-hours trading provides added convenience that may not be present during the day trading session. Not everyone is a full-time trader; thus, one of the biggest benefits of after-hours trading is that it allows one to make trades outside of standard trading hours.
Significant news events, such as company earnings releases, may be reported outside regular trading hours. Traders can use the said information to trade immediately and make profits rather than waiting until the next day to take a position.
2. Pricing opportunities
Though extended trading is often characterized by highly volatile stock prices, traders can benefit from appealing stock prices during off-peak hours. For example, when a stock is affected by a news event, a trader can benefit from placing a trade before the next day’s trading session.
3. Ability to react to fresh information
Off-peak sessions give investors an opportunity to trade new information released after the close of the normal trading day. Traders can react quickly to new information and place trades to manage their positions before the next trading session.
Risks Associated with Extended Trading
1. Limited liquidity
Liquidity depends on the existence of buyers and sellers in the market and how easy it is to complete a trade. During regular trading hours, buyers and sellers of most stocks can trade readily with one another. However, during extended hours, there may be less trading volume for some stocks, making it more difficult for buyers and sellers to execute some of their trades.
2. Large spreads
Bid-ask spread refers to the difference between ask (offer/sell) price and bid (purchase/buy) price. Less trading activity often translates to wider spreads between the bid and ask prices, which can adversely affect the market price for execution.
3. Price volatility
Given the wider bid-ask spreads, less trading volume often creates an environment for greater price fluctuations. News stories announced after-hours might have an adverse impact on stock prices, which can move drastically in a short amount of time.
4. Uncertain prices
The prices of some of the stocks traded during the extended hours may not closely reflect the price during regular hours. For example, if a stock price rises in after-hours trading, it may fall right back down when regular trading opens again, and the rest of the market gets to cast its vote on the price of the stock.
5. Intense competition
Many extended trading participants are large institutional investors with access to more capital and resources. Hence, during after hours, individual investors may be at a disadvantage as they are forced to compete against large institutional investors with large amounts of capital to invest in stocks.
CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
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