The introduction of extended-hours trading means that traders can now access the stock markets outside of traditional hours.
This allows traders to respond swiftly to news and developments such as earnings releases, economic data, policy changes, or global news without any need to wait for the markets to open.
With major global companies and brands such as Apple often reporting news and results outside regular trading hours, extended-hours trading can allow traders to capitalise on initial price movements and time-sensitive opportunities such as trading breakouts.
It is interesting for worldwide investors with a strong interest in the US stock market, but whose time zone does not align with the regular US hours. It is also convenient for working professionals for whom dedicating time to their strategy during regular market hours can prove challenging.
Pre-market trading allows individuals to trade a market before the major session opens, while after-hours trading, also known as post-hours trading, offers individuals access to trading after the main market closes.
After-hours trading is frequently utilised to allow traders to swiftly react to earnings reports that are traditionally released outside regular hours and can have a major impact on price movements.
While extended hours trading opens up a new type of trading opportunity, it does take place in dramatically different conditions than regular sessions. For example, there is typically less volume and less liquidity, in turn creating increased volatility, wider spreads, and unstable pricing.
Our comprehensive guide to pre-market trading and after-hours market trading will help traders to understand the key differences when compared with regular trading and how to manage the potential risks involved.
What Is Pre-Market Trading and How Does It Work?
Pre-market trading refers to all orders that are placed before the main session opens. It is conducted using electronic networks rather than traditional stock exchanges.
Pre-market trading hours typically cover the period between 4 am and 9.20 am Eastern Standard Time (EST) from Monday to Friday, although some brokers open later (around 6-6.30 am), with the busiest time spanning 8 am-9.20 am.
Pre-market stock trading typically takes place when traders respond to breaking news or earnings reports, both of which can significantly impact the market and stock prices.
Participation is limited in comparison to regular stock trading, as most brokers only allow limit orders during pre-market trading hours. Additionally, there are active traders, meaning more volatility, the risk of wide spreads, and sudden price swings.
What is After-Hours Trading and How Does It Differ?
After-hours market trading takes place after the main market session closes, typically from 4 pm-8 pm EST.
Pre- and post-market trading have some key similarities – both are conducted using electronic exchanges, and both of their available extended trading hours will depend on the chosen broker.
While pre-market trading activity is typically driven by overnight news, after-hours trading activity is triggered by earnings reports and/or news that breaks later on during the day.
Out-of-hours trading allows individuals to act in response to this news without having to wait until the markets open the following day.
Extended-Hours Trading: Key Differences in Volatility and Liquidity
Extended-hours trading times cover both the pre-market sessions and after-hours sessions. Conditions are very different from regular trading, with markets typically experiencing lower liquidity, higher volatility, and larger price gaps.
There are far fewer market participants during out-of-hours trading, with many institutional investors and major funds inactive during this period. With a much lower level of activity, execution speed may be slower, and trades may execute at a lower price than the expected or preferred price.
The low level of liquidity means prices are far more vulnerable to spikes and swings in response to economic data or breaking news, making volatility more likely, less predictable, and less transparent.
Trading out of hours and within these conditions means staying aware of the risks involved and adopting an extended-hours trading strategy designed to manage these unique risks effectively. This is especially pertinent for beginner traders or those placing large orders.
Extended-hours trading can have a knock-on effect on stock prices at the opening of the next regular trading session. Even though trading activity is far lower out of hours, prices can still increase or decrease significantly overnight, especially following major market news and changes.
Risks of Pre-market and After-Hours Trading for Traders
There are key risks that traders face when trading out of hours:
- Wider spreads (meaning orders may execute at a far lower price than anticipated, and their value may be under/over exaggerated)
- Slippage (prices can change very quickly, and order books may skip more easily to another price level)
- Lower liquidity (increasing the risk that orders will be only partially executed or not executed at all)
Most brokers only offer access to limited orders for extended-hours trading in order to protect against these risks, but orders may still not execute and fill as expected if the market doesn’t reach the anticipated price or the volume is too low.
The limited trading volume during extended hours may also make stocks appear stronger or weaker than they are in reality, while overall prices are more volatile.
Price gaps are another key risk that mean stop orders may trigger, but then fill at unfavourable levels. Traders also face the risk of partial order execution and an unfavourable position size or limit orders being skipped altogether if the market gaps past them.
A solid extended-hours trading strategy can help individuals to minimise exposure during poor conditions by setting daily trading limit rules. Understanding how to adopt the most effective approach is all part of the ongoing trading education to support effective and tailored risk management.
Some traders prefer to set a maximum daily loss, i.e., a cap on the total amount they are willing to lose in a single trading day. Others prefer to limit the number of trades to prevent any impulsive activity or set a maximum number of consecutive losing trades to prevent losses escalating out of control.
Pre-market Trading vs After-Hours Trading FAQs for Beginners
What are the Stock Market Extended-Hours Trading Times?
Out-of-hours trading refers to the fact that brokers now offer extended trading hours for those who wish to capitalise on opportunities and respond to breaking market news and updates outside of regular trading hours. While the times offered vary from one broker to another, pre-market trading hours typically cover the period between 4 am and 9:30 am EST, while after-hours Trading covers the period from 4 pm to 8 pm EST.
How Does Out-of-Hours Trading Work?
Due to the unique market conditions out of hours, pre-market and after-hours trading is typically completed via electronic exchange using limit orders. It allows traders to quickly react to updates that may trigger market movements, such as breaking overnight news, policy decisions, and earnings reports.
Traders can log into their brokerage account and identify strong prospects; they can then set a limit order for the broker to execute. Limit orders will see traders place a buy or sell order of a specific quantity at a certain price.
Trading rules and conditions will depend on the individual broker offering. Other traders may have specialist out-of-hours trading structures, e.g., placing limit orders to be executed at a certain time in the future.
What are the Key Risks Involved with Out-of-Hours Trading?
The trading environment out of hours is significantly different from regular hours. There is a far lower level of trading activity, which can mean wider spreads and a higher cost required to enter or exit positions. Prices are also vulnerable to larger swings and an overall higher level of volatility.
What are the Key Benefits of Extended-Hours Trading?
Trading during extended hours offers individuals the opportunity for a greater degree of flexibility in managing their portfolios across different time zones. This is especially key for investors with trading interests in a different time zone from their own, for whom trading within regular hours is not an option.
It also allows traders to react immediately to news such as earnings reports and benefit from price movements as and when they happen. Extended-hours traders can also take advantage of the opportunities associated with price swings and volatility during these hours.
Traders can also take advantage of this unique environment to hedge positions and refine their risk management strategy.
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and, as such, is to be considered to be a marketing communication.
All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.