Getting a Leg up on the Competition
The US stock market is open for business for six and a half hours—from 9:30 am to 4:00 pm ET—nearly every business day, and it draws crowds of thousands upon thousands of investors as soon as the opening bell rings. Wall Street is crowded during normal trading hours, but some investors are finding a less crowded space to trade in: the pre-market and after hours stock trading sessions.
That's right...you can actually trade before the market opens in the morning, and you can keep on trading once the market has closed in the afternoon. Of course, the playing field is a little different during off-market trading hours than it is when the full stock market is open, but we'll cover that.
After Hours Stock Trading
As its name suggests, after hours stock trading occurs after the regular stock market hours are over. After hours stock trading takes place between the hours of 4:00 and 6:30 pm ET.
But why would you want to trade stocks in the after hours trading session?
According to Chris Concannon, an executive VP in the Transaction Services Group at NASDAQ, "Many companies report earnings either before the market opens or after the market closes. The intrinsic value of a stock is constantly moving whether the market is open or not, and people want to access the market when the intrinsic value is changing."
Pre-Market Stock Trading
As its name suggests, pre-market stock trading occurs before the stock market opens up for its regular hours of trading at 9:30 am ET. Pre-market stock trading takes place between the hours of 8:00 and 9:30 am ET.
Investors like to trade in the pre-market session for the same reason they like to trade in the after-hours trading session: they want to get a leg up on the competition by reacting quickly to news announcements that occur when the regular market is closed.
Risks of Trading After Hours and Pre-Market
All investing involves risk, but the Securities and Exchange Commission (SEC) outlines the following eight risks that are specifically associated with trading in the after hours and pre-market sessions:
1. Inability to see or act upon quotes: Some firms only allow investors to view quotes from the one trading system the firm uses for after hours trading. Check with your broker to see which firm's quotes you will be able to see and off of which quotes you will be able to trade.
2. Lack of liquidity: During regular trading hours, buyers and sellers of most stocks can trade readily with one another. During after hours, there may be less trading volume for some stocks, making it more difficult to execute some of your trades.
3. Larger quote spreads: Less trading activity could also mean wider spreads between the bid and ask prices. As a result, you may find it more difficult to get your order executed or to get as favorable a price as you could have during regular market hours.
4. Price volatility: For stocks with limited trading activity, you may find greater price fluctuations than you would have seen during regular trading hours.
5. Uncertain prices: The prices of some stocks traded during the after hours session may not reflect the prices of those stocks during regular hours, either at the end of the regular trading session or upon the opening of regular trading the next business day. This means that even if a stock price rises in after hours trading, it may fall right back down when regular trading opens again and the rest of the market gets to cast its vote on the price of the stock.
6. Bias toward limit orders: Many electronic trading systems currently accept only limit orders in the pre-market and after hours sessions. Limit orders may cause you to miss out on having a trade filled.
7. Competition with professional traders: Many of the after hours traders are professionals with large institutions, such as mutual funds, who may have access to more information than individual investors.
8. Computer delays: As with online trading, you may encounter delays or failures in getting your order executed during after hours trading, including orders to cancel or change your trades.
Conclusion: Understanding Pre-Market and After Hours Stock Trading
If you are looking for an edge in your stock trading, placing trades in the pre-market and/or after hours trading sessions may be a great place to start. Just remember that there are additional risks you need to be aware of.
Check with your broker to see if it offers off hours trading and what you need to do to qualify.
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