As most stock investors know, the market’s regular hours are 9:30 a.m. until 4:00 p.m. (ET). There are holidays where the market is closed, and certain pre-holidays where the market may close early (usually at 1:00 p.m.). However, many people don’t know that there’s an opportunity to trade both before the market opens and after the market closes.
Extended trading
Extended trading is just that, a period of time before and after regular market hours where someone can trade shares. These hours usually run from 4:00 a.m. until the market opens, and until 8:00 p.m. after the market closes. Trading occurs through a computerized network that matches buy and sell orders. For instance, if you place an order to buy 100 shares of XYZ at $25 the computer will look to see if there’s an order to sell at least 100 shares of XYZ at $25. If so, the trade goes through; if not, the order is not filled.
While normal activity might be light, during earnings season more people may trade if a company announces earnings before the markets open or just after they close. Additionally, the heaviest activity normally occurs an hour or two prior to and just after normal market hours.
Benefits of extended trading
Company announcements. Company announcements and earnings releases are often publicized during non-market hours. Many follow this practice in an attempt to limit huge moves in their stock prices, especially if there’s a negative surprise in earnings or an event that could impact earnings. An investor in that stock may benefit from the ability to trade immediately when the news hits.
Economic announcements. Jobs reports and other federal news releases about the state of the economy are often published before the markets open. Here too, negative surprises can drop the markets hundreds of points. One example – in April 2021 the US announced a pause in the use of Johnson & Johnson’s COVID vaccine before markets opened. Several stock indexes pushed into negative territory immediately upon the news release (yet the S&P 500 hit a new record high that day).
Convenience. Maybe you were in meetings all day and you missed the news updates about your top holdings. Having a few more hours in the trading day can prove beneficial if you need to make trades after the markets have closed.
Dangers of extended trading
Limited liquidity. Liquidity essentially means how easily you can buy or sell a stock without impacting its price. When markets are open, the majority of stocks have many traders so your buy and sell orders can be executed with ease. During extended trading hours, there are fewer so you may have a hard time trading your shares.
High spreads. You may experience high spreads (the difference between buy and ask prices) after normal market hours. Additionally, you may experience larger price fluctuations with fewer traders. You may end up spending more than you would for the same stock during normal hours.
Limits on order type and quantity. Your brokerage may not allow any type of order except a limit order, restricting your trade to the pre- or after-market time period. Also, they may cap the number of shares that you can trade, and many securities may not be available during extended trading.
Technology. Since you are trading only through a computerized system, you may experience lags or delays in getting your orders processed.
How to get started
If you already have a brokerage account, you will simply need to complete the Electronic Communication Network user agreement. Once that’s done, you can begin trading during the extended sessions.
Extended trading isn’t right for everyone and probably isn’t something most investors will need. For instance, if you’re a buy and hold investor, selling a stock because of a surprise quarterly earnings may not be the most prudent move. Additionally, regular trading sessions provide more efficient markets and better liquidity, resulting in prices that are more aligned with the true value of the share. However the option is there should you need to quickly trade in the future.
Photo by Jonathan Fink