Active traders in financial markets see extended-hours trading as an opportunity to enter market orders ahead of the masses who trade during normal market hours, but along with opportunity, there’s also risk.
Standard trading hours are 9:30 a.m. to 4 p.m. Eastern time, but the stock market is also open to after-hours trading, from 4 p.m. to 8 p.m., and during pre-market hours, from 4 a.m. to 9:30 a.m.
Corporate earnings, international events or other market-moving news are just some of the reasons active traders venture into extended trading sessions. Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research, says its common for individual stocks to see bigger price swings and trading volume in the pre-market hours during earnings season as traders try to take advantage of the price movements.
[Read: When You Can Buy Stocks on the Dip.]
Sometimes people buying individual shares or exchange-traded funds before normal hours can do so at a cheaper price, but that’s not guaranteed. In fact, sometimes prices reverse once the market officially opens, leaving these traders with losing positions. Market watchers say that’s just one of several factors people who want to trade outside of standard hours should consider.
Not for average investors. Just about anyone can trade during these extended hours, but not everyone should, says Steve Neamtz, president of CBOE Vest, a money management firm in McLean, Virginia. “It’s for certain circumstances and certain investors,” he says.
Much of the trading done during these hours is more opportunistic or for speculative reasons, Neamtz says. Entering positions during extended hours is meant for active traders, not buy-and-hold investors, adds John Person, president of NationalFutures.com in North Palm Beach, Florida. “If you’re a long-term investor, the overnight trade isn’t what you’re following,” he says.
Rich Messina, senior vice president for investment product management at E-Trade in New York, says people who want to trade after hours need to make sure their trading platform allows it, and if the platform has any special requirements for trading at those times.
Not every stock or ETF is available for trading then, either; only the most actively traded shares, something like Apple (ticker: AAPL), are big enough to sustain a market outside of regular hours, experts say.
Traders who want to enter an order for the extended trading time must specify it’s for the pre-market or after-hours trade so there’s no misunderstanding, Frederick says. Also, those orders expire when the regular trading day opens if the position wasn’t filled, he adds.
[See: 9 Ways to Spot Value Trap Stocks.]
Prepare for motion sickness. There’s a reason why markets have the greatest number of participants trading during regular market hours. More participants makes markets more liquid so that the price spread between buy and sell offers is minimal. During regular hours, all the major markets are open too, but after 4 p.m., it’s mostly the second- and third-tier regional stock markets, like the Philadelphia Stock Exchange or the Chicago Stock Exchange, that are open, Neamtz says.
With fewer participants and wider price spreads, executing a trade can be costlier because these less-liquid markets often produce greater price swings. For example, during regular trading hours the price spread for a particular stock or ETF may be 2 cents, but after hours, it may be 10 cents, Messina says.
Not only is the spread usually wider, but there may be fewer shares available for trading, too. “It’s definitely a much more risky thing to do,” Frederick says of the extended-hours trade. “We don’t tell people don’t do it; we caution them about those risks before they consider it.”
Just as it’s always good to study an investment before buying, Messina advocates would-be traders do the same of extended-hours trading. If you have a particular stock you’re looking at, “I would watch the market a little bit first before putting my toes in,” he says. “Don’t jump in first thing tomorrow morning. See how the spreads are. Obviously there’s a risk that you may miss the opportunity, but better safe than sorry in the beginning.” Frederick suggests would-be traders use small positions and small amounts of money to get started.
To give you an idea of how trading after hours can work, Person describes what happened in September, when news broke after hours that Advanced Micro Devices (Nasdaq: AMD) might supply artificial intelligence chips to Tesla ( TSLA). The stock price moved higher in after-hours trade, but during regular trading hours, the price fell. “People realized it didn’t translate into sales and that this was just a maybe,” he says. “If you sold it [AMD], you would have made money, but if you bought after hours, you would have lost money.”
[See: The Fastest Ways to Lose Money in the Stock Market.]
Although after-hours trading gives the retail trader more access to the market, people still need to be careful. “It’s a double edge sword,” Person says. “It could help you; it could hurt you. It’s up to the individual to know the rules of the game,” and whether it’s worth playing at all.
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After-Hours Trading Offers Promise and Peril originally appeared on usnews.com