Understand The Impact Of Extended Hour Trading On The Overall Market
The U.S. Stock Market stays open for business for six-and-a-half hours, which is from 9:30 a.m to 4:00 p.m. ET.
Wall Street stays crowded during general trading hours; however, some investors find it less crowded to trade in the pre-market and after-hours stock trading sessions, often referred to as the extended hour trading.
These trading sessions come with benefits as-well-as downsides as the generic behavior of the market varies diversely.
Extended Hour Trading – A Detailed Guide
Table of Contents
- Extended Hour Trading – A Detailed Guide
- Stock Trading Sessions
- Stock Pricing Variations During Extended Hours Trading
- Other Variations In The Market
- Final Words
Trades in the extended-hours session happen through electronic communication networks (ECNs) that connect potential buyers and sellers without implementing a traditional stock exchange.
Extended-hours trading is more volatile and involves higher risk. Prices fluctuate extensively during extended hours, and the opening value the following day might not be the same as in the extended-hours market.
Trading outside regular hours has prevailed for a long time; however, it was once only the realm of high-net-worth investors or institutional investors such as mutual funds.
This notion changed after the emergence of ECNs because it enabled individual investors to take part in after-hours trading.
Financial Industry Regulatory Authority (FINRA) members can now freely enter quotations during the extended-hours sessions but must comply with all applicable limit order protection as-well-as display rules.
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Stock Trading Sessions
There are three markets in which you can trade shares –
- Pre-market trade – 4:00 a.m. to 9:30 a.m. ET.
- Regular-market trade – 9:30 a.m. and 4:00 p.m. ET.
- After-hours market – 4:00 p.m. to 8:00 p.m. ET.
The pre-hours as-well-as the after-hours markets function in the same way as the regular market; however, the shares traded between parties follow the agreed-upon price.
In simpler words, the price you receive is the price that someone in the after-hours or pre-market wishes to pay.
Stock Pricing Variations During Extended Hours Trading
Extended hours trading is not like regular market trading, as terms and conditions as-well-as risks vary.
The U.S. Security Exchange Commission has warned investors to be wary of the risks of trading securities in the extended hours.
The market conditions in the extended hours fluctuate and thus, traders must know the following points –
1. Trade Order Handling
You may not always have access to the best possible displayed price while executing a trade in the extended hours.
Many companies publish earnings either before the market opens or after it closes. The underlying value of a stock is consistently moving, irrespective of the market is open or not, and people desire access to the market when the intrinsic value is shifting.
People want to gain the upper hand in the competition by reacting instantly to news announcements that happen when the regular market is not open yet.
2. Minimal Liquidity
In extended-hours trading, there is the risk of pitiable liquidity, which implies that there are not enough buyers or sellers available to secure a fair price on a trade.
However, in regular trading hours, the market is full of buyers and sellers, and there is a good deal of trading partners, which boosts the chances of obtaining your preferred trade price.
As the SEC says, with lower trading liquidity, Main Street investors risk higher trading costs, elevated uncertainty about prevailing security prices, and also experience deterrents while executing trades.
You need to cautious while stock trading in the extended hours, which is where Alpaca can help you understand how to tread carefully without sustaining unnecessary losses.
3. Larger Trade Quote Spreads
In extended-hours trading, the scarcity of securities traded and less demand for trading can cause bigger quote spreads (the distinction between the bid and ask price on a security).
Large quote spreads lead to decreased odds of getting your buy or sell order accomplished and not securing the trade price you anticipated on the transaction when compared to standard trading hours.
4. The Volatility of Trade Pricing
Fewer securities available to trade in the extended hours implies more dramatic price fluctuations compared to securities traded in daytime trading sessions.
Investors looking to trade securities in the extended hours can rely on trading prices differing significantly from regular trading hours, mostly because of high volatility.
5. Permission for Limit Orders Only
Brokerage companies only permit the execution of limit orders in the extended hours at the limit price or higher, as said by the SEC.
Extended hours investors should realize that if the price sways from the limit order, that trade will get removed from the table, and the set regulations would disallow transactions.
If an after-hours trade stays unexecuted overnight, the investor should confirm with the brokerage firm and see if it will get automatically executed the following trading day, when the markets re-open.
Other Variations In The Market
Prices are subject to change in the extended hours market. However, once the regular market opens, the stock might not open at the same value at which traders invested in it in the after-hours market.
For instance, if the price of a stock increases in the after-hours market because of a rumor of boosted sales, there might be many investors who wish to sell immediately at the market open.
Such a rush of trade activity would increase selling pressure and drive the price of the stock down compared to the after-hours level from the previous day.
The price changes observed in the after-hours market are insightful for determining how the market reacts to the latest information released after the regular market has closed.
However, after-hours price changes can be more volatile than regular hours prices, so you should not rely on them as an accurate impression of where a stock will trade as-soon-as the next regular session opens.
If you decide to trade in extended-hours trading, make sure to check with your broker or trading platform and inquire about any special regulations that could apply to your trading practices.
Just remember that there are significant risks involved due to the high volatility of the market in the extended-hours trading.
Check with your broker to inspect if it offers off-hours trading as-well-as the requirements needed to qualify for trading in extended hours.
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