Trading in the Pre- and Post-Market Sessions

Novice stock traders know the stock market has regular trading hours. Unless it's a holiday, the market is open for business between 9:30 a.m. and 4 p.m. Monday to Friday. Billions of shares of stock are traded in the American markets alone, making them very liquid and efficient.

What new traders may not know is the stock market is also open for business before and after regular trading hours. Pre- and post-market trading sessions allow investors to trade stocks between the hours of 4 a.m. and 9:30 a.m. during pre-market trading, and 4 p.m. to 8 p.m. for the post-market session.

Compared to the billions of shares traded during the day, after-hours sessions trade only a small fraction of that volume, which invites other problems traders have to consider before trading outside of the normal day. Can you make money trading before or after the bell? It's possible, but first, you have to do your research.

Reacting to Company Announcements

Companies are strategic about how they announce important information like earnings reports. They don't like to make announcements during regular trading sessions because it could cause a large knee-jerk reaction that misrepresents the true value of their stock. If a company announced its last-quarter earnings and they were worse than expected, a large-scale move out of the stock could result in unwarranted big losses.

But the value of the stock can still move even when the market isn't open. Investors will want access when that value changes, which is why after-hours sessions are so important. So if you trade when these announcements are made, that means you're better able to react to the news. Once the market opens, share prices will have already changed, causing the stock price to better reflect fair value. And if you've already hit that point, it may have become too late to make a trade.

Economic Indicators

Many economic indicators are released at 8:30 a.m. — an hour before trading begins in New York. Market reaction to these indicators can cause big movements in price, and therefore, set the tone for the trading day.

For example, the jobs report issued by the U.S. Bureau of Labor Statistics (BLS) — released on the first Friday of every month — has one of the biggest impacts on the market. When the data released comes above or below expectations, traders can expect volatility in the market.

Liquidity Limitations

In the past, pre- and after-hours trading used to be one of the benefits of being an institutional investor. Retail investors did not have access, but that has changed since the markets transitioned to computerized trading. Retail investors now have access to these markets, but is it wise to trade in these after-hours sessions?

The Securities and Exchange Commission (SEC) wants you to know a few facts before trading after regular hours. First, these markets are less liquid. Also, because there are far fewer people trading, you may not be able to sell your stock. If an earnings announcement is worse than expected and you want to sell your shares quickly, you might not be able to — especially with smaller, non-blue-chip companies.

Wider Spreads, Higher Volatility

Another factor to consider in after-hours trading is the bid-ask spread. The spread between the two prices might be wide, meaning the small number of traders haven't agreed on a fair price. Therefore, you may have to settle for a price that doesn't reflect fair value.

Finally, because after-hours sessions are largely made up of professional traders and the volume is low, higher price volatility may be present. This may make it more difficult to know when to buy or sell. One large trade by a large firm could have a significant impact on the price of a stock.

Limitations After Hours

If you decide to trade during pre-market and after-hours sessions, you may be limited in what you can do.

If we take a look at Charles Schwab's extended-hour overview, there are key differences between standard trading and after-hours trading. During the regular trading day, traders can expect:

  • Trading on exchanges.
  • To execute many order types and restrictions at any order size.
  • A variety of security types including stocks, options, bonds, and mutual funds.
  • Traders have different time limits available to them.

Compare that to the brokerage's after-hours session:

  • Trades happen through an electronic market.
  • Only limit orders are accepted with a maximum of 25,000 shares on one order.
  • Most listed and NASDAQ securities are available.
  • Orders are only good for the particular session in which they are placed and are not good for carryover into the next trading session.

How do I Trade After Regular Hours?

Check with your broker. Most brokers now have access to after-hours trading for all their investors. Some brokers allow limited access, while others may only have access to certain computer networks which makes order execution speeds slower. As the SEC advises, read all disclosure documents before proceeding.

Technology Glitches

One of the things investors will have to deal with is system-related, which comes with online trading as a whole. When it comes to after-hours trading, there may be lags and delays to getting your orders executed. Even worse, your orders may not even go through at all.

The Bottom Line

After-hours trading may have benefits for traders trying to profit on expected news, or it may provide a means of entering or exiting the stock if unexpected news is announced. Nevertheless, routine trading after regular hours is not recommended for most traders. The regular trading sessions offer better liquidity and more efficient markets, which makes all prices more reflective of fair value. It's important to understand that different brokerages have different rules on trading hours.

Article Sources
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  1. Nasdaq. "Market Trading Hours for Nasdaq."

  2. NYSE. "Holidays & Trading Hours."

  3. NYSE. "Transactions, Statistics and Data Library."

  4. Bureau of Labor Statistics. "Schedule of Releases for the Employment Situation."

  5. Securities and Exchange Commission. "After-Hours Trading: Understanding the Risks."

  6. Securities and Exchange Commission. "Investor Bulletin: After-Hours Trading," Pages 1-2.

  7. Charles Schwab. "About Extended Hours Trading."

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