Throughout your investing journey, you’ll likely hear about market activity that takes place during “extended trading hours.” But what exactly are these shadowy-sounding periods, and should you participate?
One of the great advantages of living in a digital world is the unprecedented level of convenience it grants us. Whether we want immediate access to the latest book or film, or a pepperoni pizza at 2am – the Internet will help us find a way.
And thanks to electronic communication networks, or ECNs, the investing world has nearly caught up with retail when it comes to convenience. Even when the business day is over and most of Wall Street’s traders and brokers are already driving home from the office, the stock market can still be accessed from the palm of your hand.
What is extended hours trading?
Simply put, extended hours trading refers to any type of trading conducted before or after regular hours. (Regular hours, by the way, normally run from 9:30am to 4:00pm EST).
These extended hours are typically divided into two distinct sessions – “pre-market” and “after-hours.” Pre-market trading in the US typically takes place between 6:00am and 9:30am EST and after-hours trading usually runs from 4:00pm to 8:00pm EST.
In the past, trading at these times was limited to a select group of institutional investors, but with the increasing democratization brought on by the Internet, nowadays anyone can trade after-hours, as long as his or her broker allows it.
What are the risks involved?
While it’s arguably a very positive thing that more of us have access to these trading periods, this doesn’t necessarily mean that you should jump into after-hours or pre-market sessions without serious consideration.
Indeed, you will probably be at a distinct disadvantage here, since the primary traders at these times tend to be professionals who are trained in seeking the best possible prices for themselves. People like this will possess skill-sets that you probably don’t have, and aren’t expected to have.
On top of this, extended hours trading will offer you lower liquidity. This means that you will be dealing with fewer market participants and fewer trading options. The process of buying and selling may suffer delays or even failures to execute. Worse still, some stocks do not trade at all during these times.
The volatility on display during extended hours can be worrying and confusing. If a company has released consequential news after market – a troubling earnings report, for example – there is likely to be a chaotic flurry of activity in after-hours trading. Share prices may plummet or soar.
But here’s the thing; this volatility will, more often than not, calm down by the opening of the market and the share price will return to more reasonable parameters. By then, if you’d joined the after-hours pandemonium, you might find yourself in the sorry position of having sold for too low or bought for too high.
If you’re absolutely intent on trading immediately – and really don’t mind taking these risks – then you should at least make sure to place an order at a specific price. This is called a “limit order”, and it will protect you from some of the more dramatic price swings that are bound to take place.
What’s the bottom line?
Here at Rubicoin, we recommend the long-term, buy-and-hold approach to investing. When you buy a stock, you should be thinking in terms of years and decades, rather than following the ups and downs of the news cycle.
Ideally, you will spend some time getting to know a company before buying into it, not because it has just released some promising news that might send the share price soaring, but because you believe in its power to grow and endure.
In other words, the risks you’ll encounter during extended hours will not, in the end, be worth the hassle.
You’ll be far better off limiting your trading to regular hours. There will always be higher liquidity, lower risk, and more reasonable prices when you buy and sell by daylight.
Rubicoin operates a full disclosure policy. Rubicoin staff may currently hold long positions in some of the companies mentioned in this article.