Learn how extended trading works and how investors can benefit from making trades outside of normal stock market hours.
Definition and Examples of Extended Trading
Extended trading is the activity of trading securities before or after official stock market hours. In the U.S., stock exchanges like the New York Stock Exchange (NYSE) and the NASDAQ have official trading hours of 9:30 a.m. to 4 p.m. ET, which are marked with the opening and closing bells. Yet in some cases, you can still buy and sell stocks outside of these regular trading hours.
Alternate names: Extended-hours trading, pre-market trading, after-hours trading
For example, if a company releases its earnings report shortly after the 4 p.m. E.T. closing bell, you might want to buy this stock right away, rather than waiting until the next day to take advantage of price trends. The exact hours of extended trading can differ among brokers and exchanges, but they generally run a few hours before and after the official stock market hours. Through NYSE Arca, for example, brokers can place trades during the extended hours of 4 a.m. to 9:30 a.m. ET as well as 4 p.m. to 8 p.m. ET.
How Does Extended Trading Work?
Extended trading generally works by brokers routing orders through what’s known as electronic markets—such as an electronic communications network (ECN)—as opposed to traditional exchange trading. ECNs can be operated by financial services firms like broker-dealers or exchanges. NYSE Arca, for example, is an ECN.
Risks To Consider
Extended trading can bring more opportunities for investors, but you must also consider their additional risks. For one, extended hours often involve lower liquidity and higher volatility. During the day, both individuals and institutions are often actively buying and selling stocks. But before the market opens and after it closes, fewer trades tend to take place. This means each trade can have a larger impact on stock prices, causing more dramatic swings than trades that take place during busier market hours. Bid-ask spreads might be wider during extended-hour trading. During normal trading hours, plenty of sellers might be available to meet your bid price of, say, $100 per share. With fewer sellers around during after-hours trading, however, perhaps the lowest you could buy the stock for is, say, $100.10 per share—even if that’s more than what the stock trades for during normal hours. Regardless of the downsides compared to trading during regular market hours, many investors still like to take advantage of extended trading hours as there are plenty of reasons to trade before the opening bell or after the closing bell. Some want to trade on after-hours news, while others, for example, may want to put in a limit order that didn’t fill during the day.
Pros and Cons of Extended Trading
Pros Explained
More time to make trades: Trading before or after the regular market hours gives you more time in the day to make trades.Can react to news outside of normal trading hours: You can trade directly following an after-market earnings announcement, for example.
Cons Explained
May not get the best pricing: Different order routing practices and wider bid-ask spreads, for example, can affect the stock prices you buy and sell during extended trading.Orders might not go through: Due to low liquidity, you might not be able to find a buyer or seller.Pricing can be more volatile: Lower trading volumes can lead to more dramatic price swings.
What Does Extended Trading Mean for Individual Investors?
Individual investors should consider the risks of extended trading before engaging in this activity. If you’re comfortable with the risks and want the option to make trades before or after stock markets officially open or close, check your broker’s extended-trading policies. One option, which might be required by your broker, is to place limit orders instead of market orders. With limit orders, you specify the exact price at which you’re willing to make the transaction. So if you put in a limit order to buy a stock for $100, you won’t pay more than that for it.
