Have you ever watched stock prices continue to move after the market has closed and wondered how that is possible? In this article were going to cover everything you need to know about extended hours trading along with some of the risks you should be well aware if you decide to participate.
- Extended hours trading allows investors and traders to buy and sell securities outside of the regular permitted trading hours
- Extended trading hours have lower volumes, increased risk and volatility, and additional trading fees
- Brokers may limit extended hours trading depending on your accounts type and the securities you want to trade
What is Extended Hours Trading?
Extended hours trading is a period of time after the regular stock market closes when investors and traders can buy and sell securities (outside of regular permitted trading hours ) 9:30 am – 4:00 pm. It’s important to note that this type of trading may be limited to people. This depends on the brokerage that they use. The standard trading hours are set by the exchanges. The origin of extended hours trading dates back to something known as “curb trading”.
If your broker does permit after-hours trading, they will most likely limit the type of orders you can place. Most brokers will not allow regular market orders during after hours trading due to liquidity and execution risk. They will most likely require you to submit limit orders during extended-hours trading.
How does Pre-Market and After-Market Trading Work?
There are essentially 3 primary time windows in which traders and investors can buy and sell securities.
- The pre-market trades from 4:00 a.m. to 9:30 a.m. ET.
- The regular market trades between 9:30 a.m. and 4:00 p.m. ET.
- The after-hours market trades from 4:00 p.m. to 8:00 p.m. ET.
The pre-market and after-hours markets operate in the same way as the regular market in that securities are traded on an agreed-upon price. The price you receive during pre-market hours and after-market hours is the price that someone is willing to pay.
Important: It’s worth noting that your broker can limit which securities can be traded during extended-hours trading.
Understanding Extended Trading
Extended hours trading is also commonly referred to as “after-market hours trading” .
Trading outside regular trading hours has been around for quite some time and it was typically reserved for high net worth individuals and institutional style investors. The emergence of ECN’s has enabled regular retail traders and investors to participate in after-hours trading.
It allows retail investors and traders to trade on news events when the exchanges are closed. It can be a great way to reduce your risk as well as take on risk before the market opens.
If your broker permits after hours trading, they will most likely limit the type of orders you can place. Most brokers will not allow regular market orders during extended hours trading due to liquidity and execution risk. They will require traders to enter positions only with limit- orders during extended trading.
Risk Associated with Pre-Market and After Hours Trading
It’s important to note that pre-market and after-market hours trading will have reduced liquidity, higher potential for volatility, and thinner volumes than regular trading hours. This will greatly impact the price a seller ends up receiving for their shares. As such, it’s important that you understand the different order types and their implications.
Limited Order Types
It’s important to note that in order filled on during extended hours, most brokers will only accept limit-orders and prohibit you from getting filled on market orders. This is a protective measure for traders and investors to prevent them from receiving fills that are not in line with the actual market.
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This protective measure can vary from broker to broker. But, most will not allow you to get filled on market orders during extended hours trading. This reduces the potential for execution risk.
Less volume tends to equate to larger bid-ask spreads which can make it harder for investors and traders to get executed on a price they want. Spreads during extended hours trading will always be wider than regular market hours.
Less trading volume tends to lead to more price volatility and can cause prices to vary dramatically in a short period of time. Price spikes during extended hours trading are common. It’s important to be aware of how quickly prices can change during extended hours, so you can have a clear expectation on your fills should you decide to place trades.
Additional Trading Fees
Another thing to keep in mind is that most of the orders that get matched during extended hours are facilitated by ECN’s which may have additional trading fees.
This is due to the complex pricing factors involved with extended hours trading and the extra clearing fees that venues charge for facilitating extended hours trading.
Benefits of Extended Hours Trading and Why People Trade Them
There are many unique reasons why investors chose to trade during pre-market and after-market hours.
For one, it allows investors and traders to exit positions they don’t want to hold overnight. It also allows them to reduce exposure going into certain economic or news related events they failed to exit during regular trading hours.
Being able to trade after the regular market closes can allow you to act quickly to breaking news events by companies such as earnings releases or fresh information before the market opens up the next day.
Although spreads and volatility increase during extended hours, it provides you with additional time to get into trades that you may have missed during regular trading hours.