Anyone who has ever witnessed the ringing of the iconic opening and closing bells at the NYSE is aware that the trading day lasts from 9:30 a.m. and 4:00 p.m. for most retail traders. However, there is plenty of trading activity happening both before and after the bell as well.
The market has both extended premarket and post-market trading sessions. The premarket session lasts from 4:00 a.m. to 9:00 a.m., and the post-market session lasts from 4:00 p.m. to 8:00 p.m.
There are a number of potential benefits to taking advantage of these extended market hours, but there are also plenty of risks. Here’s what you need to know.
THE PROS OF EXTENDED-HOUR TRADING
One of the major benefits of trading in extended hours is that it allows retail traders to trade major market-moving news events in real time. Companies typically report major news items, such as quarterly earnings reports, either before the regular trading session begins or after it ends. The idea is that these companies want to minimize the market’s potential knee-jerk reaction to the news by giving investors time to digest it prior to trading. Extended-hours traders can react to an earnings miss or beat in real-time rather than waiting for the next session to open.
In addition, after-hours trading can be ideal simply because of its convenience. For some traders who work other jobs, the extended-hours trading sessions may offer the only convenient opportunity for distraction-free trading.
Finally, for traders using technical analysis-based trading strategies, technical signals often occur during the after-hours session. Even for technical signals that rely on opening and closing prices, a trader can use the premarket trading action to anticipate when a signal will likely occur after the open and get in ahead of the rest of the market.
THE CONS OF EXTENDED-HOUR TRADING
While there are certainly benefits to extended-hours trading, the SEC wants to make sure that all traders are aware of the risks as well.
The biggest risk associated with after-hours trading is a severe lack of liquidity in most stocks and ETFs. That lack of liquidity frequently results in huge, wild swings and big jumps in share prices during extended hours. A relatively small after-hours market buy could single-handedly drive a stock’s share price up 5 or 10 percent if there are no sellers available.
Secondly, the bid-ask spread, which is often $0.01 during regular trading hours, can widen significantly in the extended-hours session. That gap means that extended-hours traders must first bridge that spread before turning a profit in the extended hours.
Another major disadvantage to trading after hours is that the vast majority of extended-hours traders are professionals. That means that the zero-sum game of short-term trading is…
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