Extended Trading Definition and Hours

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Extended Trading Definition and Hours

What Is Extended Trading?

Extended trading is trading undertaken by electronic networks before or after the listed exchange’s normal trading hours. When compared to normal trading hours when the exchange is open, such trading has a lower volume.

In the United States, pre-market trading in stocks normally occurs between 4:00 a.m. and 9:30 a.m. Eastern Time, while after-hours trading occurs between 4:00 p.m. and 8:00 p.m. Eastern Time (EST).The stock exchanges in the United States are open from 9:30 a.m. to 4:00 p.m. EST.

Key Takeaways

  • Extended trading is trading that takes place on electronic marketplaces outside of the exchange’s regular trading hours.
  • Extended trading hours differ depending on the asset or securities being traded. US stock exchanges are open from 9:30 a.m. to 4:00 p.m. EST. Outside of certain hours, trading continues.
  • Reduced volume over prolonged hours might increase risk and volatility, but it can also create chances for the intelligent trader.

Understanding Extended Trading

Extended hours trading has been democratized via Electronic Communication Networks (ECNs), and even ordinary investors may now conduct transactions outside of normal exchange hours. Extended trading allows investors to react swiftly to news and events that occur while the exchange is closed, making it an outstanding predictor of open market direction.

Because market orders are dangerous during lengthy trading sessions, most brokers require clients to submit limit day orders.

Furthermore, most brokers only allow prolonged trading on Reg NMS equities. During prolonged trading hours, over-the-counter securities, several kinds of funds, certain options, and other markets may be unavailable.

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Extended Trading Hours

The bulk of prolonged deals take place during normal trading hours. This is due to the fact that most news affecting investors happens either before or immediately after the exchanges open or shut.

In the United States, investors may normally begin trading around 4:00 a.m., however the bulk of extended trading takes place between 8:00 a.m. and 9:30 a.m. EST. Similarly, investors may trade after the stock exchanges shut until 8:00 p.m., however the bulk of extended trading happens before 6:30 p.m.

There may be high prolonged trade activity if a big news event happens before or after the market opens or closes. However, on most days, traffic in the extended hours is lower than volume during the exchange’s regular hours.

Some equities and exchange traded funds (ETFs) move heavily in the pre- and post-market (extended hours), while others trade very little or not at all.

The options and futures markets in the United States have varying trading hours based on the underlying assets, however the currency market is open 24 hours a day.

Extended Trading Risks

The Securities and Exchange Commission (SEC) of the United States identifies many dangers connected with prolonged trading, including:

  • Limited Liquidity: Because extended hours have lower trading activity than normal hours, it may be harder to complete deals. During lengthy hours, certain stocks may not trade at all.
  • Large Spreads:Lower trading volume often correlates to higher bid-ask spreads, which may have a negative impact on the market price for execution, making it more difficult to execute orders at favorable pricing.
  • Increased Volatility: Because bid-ask spreads are bigger when there is less trading activity, the atmosphere for more volatility is typically created. Prices may change dramatically in a short period of time.
  • Uncertain Prices: The price of a stock trading after hours may differ from the price during normal hours.
  • Professional Competition: Many extended trading players are major institutional investors with considerable resources, such as mutual funds.
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Extended Trading Opportunities

All of the risks associated with extended-hours trading may also be opportunities if a player is able to get in on the first floor. For example, if a stock finished at $57, a bid to buy at $56 or $55 may be triggered in extended trading since there are fewer bids out, and if someone wants to sell, they may sell for $56 or $55 even though the price was $57 only minutes earlier. The stock may even complete orders between $54 and $60, for example, before resuming trading at $57 the following day.

The ability to trade throughout longer hours also allows investors and traders to respond quickly to news that is released while the exchange is closed. If a firm publishes terrible profits, the stock will most likely begin to fall, allowing the trader to exit their position sooner rather than waiting for the exchange to open. By the time the exchange opens, a lot more selling may have occurred, and the price may be substantially lower.

Example of Extended Trading in the Stock Market

The chart below depicts the extended trading session on Twitter Inc. (TWTR) on a normal day when there are no noteworthy business announcements.

The stock is scheduled to shut for trading on the exchange at 4:00 p.m. The one-minute chart is active prior to 4:00 a.m., showing price change every minute of the trading day. Volume is also related with each of the one-minute price bars.

Image by Sabrina Jiang © Investopedia2020

The loudness lowers substantially around 4:00 p.m. Because there was just one transaction at that price level during that one-minute time, several of the price bars show as dots. There are gaps between the dots (and certain price bars) because prices may fluctuate even when no transactions have occurred. Because there are fewer bids and offers, a change in bids or offers may attract or terrify someone into transacting at the new price or offer.

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In this scenario, the final transaction of the evening happens at 7:55 p.m. In this example, the first transaction happens the next morning at 7:28 a.m. The price is trading higher than the previous closing price, but it soon falls more than $0.75 in minutes. Before the official exchange open and volume increases, the price oscillates some more on low volume.

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