Pre-market and after-hours trading occurs before and after regular stock market hours. Pre-market can occur between 4:00 am and 9:30 am, with most trade volume between 8:00 am, and 9:30 am. After-hours trading runs from 4:00 pm to 8:00 pm.
While this may sound simple enough, trading during these extended hours is different from trading during regular hours. In this post, we’ll look at the opportunities pre-market, and after-hours trading provides and the risks and limitations associated with them. We’ll also touch on how pre-market and after-hours trading can impact the regular trading session.
Pre-Market and After-Hours Trading Hours
Let’s start with a refresher on regular trading hours in the United States.
The New York Stock Exchange (NYSE) trading schedule, followed by most other major exchanges in the United States, runs Monday through Friday from 9:30 am to 4 pm eastern time, except for holidays.
Pre-market hours vary. They begin as early as 4 am and continue until the market opens for regular trading hours at 9:30 am, but most pre-market trading occurs between 8 am and 9:30 am. After-hours trading begins after the regular trading session has ended at 4 pm and may run as late as 8 pm.
As you can see, pre-market and after-hours trading dramatically increases the time traders may place trades. The regular trading session for the U.S. stock market is six and a half hours. Pre-market trading can add up to four and a half additional hours, while after-hours trading has the potential to add another four hours. Combined, pre-market and after-hours trading can add eight and a half extra hours, more than doubling the number of trading hours in a day.
While this is the maximum amount possible, the hours vary. Few brokers provide investors with the entire eight and a half hours, but smaller sessions also have an impact. Even brokers that only allow pre-market trading between 8 am and 9:30 am and after-hours trading from 4 pm to 5 pm add two and a half hours of trading to the regular six and half hour day.
We now know what pre-market and after-hours trading are and when, but how does it work?
During regular trading hours (9:30 am to 4 pm), investors can trade with an exchange, such as the New York Stock Exchange, or through digital markets known as electronic communication networks (ECNs). In extended-hours trading, since exchanges are closed, all trades are made through ECNs.
ECNs are an alternative trading system that allows investors to trade outside of a stock exchange. Individual investors typically cannot place trades directly with an ECN. Only subscribers may place trades on an ECN, and only broker-dealers and institutional traders may be subscribers. For an individual to place a trade, they will need to do so through a broker-dealer subscriber.
If you’re interested in extended-hours trading, you should know that the hours vary depending on the ECN and the broker. For example, Schwab has after-hours trading from 4:05 pm until 8 pm, while Wells Fargo only allows after-hours trading from 4:05 pm to 5 pm.
Extended hours trading allows investors to respond to events more quickly. Whether you choose to participate in pre-market or after-hours trading, it’s still essential to understand and remain aware of it since it impacts trading during regular hours. Trading outside of normal hours allows trades based on earnings releases, economic releases, significant events in the news, and the futures market.
Quarterly earnings reports are typically released outside of regular trading hours, either before the market opens or after it closes. Pre-market and after-hours trading allows traders to react to information from these earning reports as quickly as possible.
Many major economic releases, including the Bureau of Labor Statistic’s monthly Employment Situation Summary, the weekly jobless claims, and the gross domestic product report, are all released at 8:30 am. Since this is an hour before the market’s regular trading hours, pre-market trading allows for trades based on this information to take place in the hour before regular trading. Again, even if you choose not to take part in pre-market trading, how the pre-market reacts to these releases often sets the tone for the rest of the day, and it, therefore, benefits investors to remain aware of pre-market trading.
Significant events that impact the economy are not limited to the six and half hours of trading that occur Monday through Friday. Natural disasters, wars, attacks, or other significant events may occur at any time and could substantially impact the stock market. Before the markets open, pre-market trading provides opportunities to minimize risks created by important events.
The futures market trades futures contracts and agreements to buy or sell an asset at a specified future date and time. Benchmark index futures, such as the S&P 500, allow traders to understand how the stock market is expected to perform. Therefore, pre-market trading of these benchmark indices is watched closely since it can provide information on how the stock market may be expected to accomplish that day.
In theory, pre-market and after-hours trading is a fantastic opportunity, and it can be, but it’s not without its risks. All trading comes with risk, but extended hours trading comes with many additional risks. If you choose to trade during extended hours, you should consider a few of these other risks.
A significant risk for all investors who participate in extended-hours trading is that the quotes they see may only be from the one trading system used by that firm. Before you begin extended hours trading, you’ll want to check with your broker and ask which quotes you’ll have the ability to see.
The lack of liquidity is one of the most significant risks of extended-hours trading. Since fewer people trade during extended hours, there’s typically less trading volume. This means executing trades may prove more difficult. Less trading volume also leads to higher spreads between the asking and selling prices. This means that during extended hours of trading, you may not get as good a price as you could have if you traded during regular trading hours.
Prices during extended hours trading may be both more volatile and more uncertain. Less activity means prices may fluctuate more during pre-market and after-hours trading than regular trading hours. There is also the risk of more uncertain prices. The price of a stock in extended-hours trading may not reflect the price of that same stock during regular trading hours.
Most of those engaged in extended-hours trading are professional investors from large institutions. These professionals typically have more experience and often more information than the average investor, which has the potential to put individual investors at a disadvantage.
Limitations on Pre-Market and After-Hours Trading
Even if you find extended hours trading worth the potential risks, you still may face difficulties due to the limitations placed on extended-hours trading. The available hours will vary depending on the ECN and the broker you trade through. Similarly, the specific policies and rules regarding extended-hours trading will vary based on the ECN and the broker.
Some brokers and ECNs have more limitations than others. Some areas where you may find limitations include the maximum size of shares in one order, the securities available, and time limits. Investors interested in extended-hours trading will need to familiarize themselves with any trading limitations imposed by their broker and the ECN they use.
Like many investing opportunities, pre-market and after-hours trading may provide investors with some added benefits but also some additional risks. If you choose to participate in pre-market or after-hours trading, you’ll want to take the time to understand the specific hours, policies, and limitations of your broker and ECN.