Extended Hours Trading Guide: Pre-Market & After-Hours

Extended-hours trading, encompassing both after-hours and pre-market sessions, plays a crucial role for traders seeking to capture market movements beyond standard trading hours. This flexibility enables traders to stay abreast of breaking news and events that occur outside regular market hours, potentially offering advantageous trading opportunities. However, it also introduces unique risks such as lower liquidity and increased volatility, impacting trade execution and pricing dynamics. Understanding the nuances of extended-hours trading is essential for CFD (Contracts for Difference) traders aiming to navigate the market dynamics governing the price movements of their chosen contracts' underlying shares and/or ETFs, and/or other exchange traded products. Furthermore, pre- and post-market trading is available on the Plus500 platform for the Magnificent 7 tech share CFDs as well, allowing real-time reaction to quick-moving market events.

TL;DR

• Extended-hours trading allows buying and selling of securities outside standard market hours, from 4:00 a.m. to 8:00 p.m. EST.
• It includes both pre-market trading (before 9:30 a.m. EST) and after-hours trading (after 4:00 p.m. EST).
• Trading during these times is facilitated by Electronic Communication Networks (ECNs) but comes with risks such as lower liquidity and higher volatility.
• Plus500 offers pre- and post-market trading from 4 a.m. to 8 p.m. EST on the Magnificent 7 tech share CFDs, allowing fast-paced reaction to market events.

What Is Extended-Hours Trading?

Before we dive in, it is important to make note of the key differences between traditional stock trading on the markets addressed below and CFD trading. While the purchase of a share of traditional stock in a company provides you with partial ownership and the attendant rights and responsibilities, CFDs are financial derivatives based on, in this case, the underlying shares. Additionally, CFD trading is characterised by the use of leverage, which allows traders to control larger positions with lower amounts of up-front capital but also increases the risk of significant financial losses.

Extended-hours trading refers to the buying and selling of securities outside the standard trading hours of major exchanges. However, the trading of CFDs based on exchanges like the S&P 500 or Nasdaq (US-TECH 100), which will follow securities on these exchanges, may vary based on your trading provider.

This extended period includes both after-hours trading, which occurs after the market closes, and pre-market trading, which happens before the market officially opens. During these sessions, investors can place orders to buy or sell securities, although the trading environment and rules differ from those during regular market hours. For instance, while some brokerages may allow various types of orders, others restrict trading to specific order types like limit orders.

Additionally, the exact hours during which trades can be made in extended sessions vary; for example, pre-market trading may be available from 4:00 a.m. to 9:30 a.m. EST, while after-hours trading might run from 4:00 p.m. to 8:00 p.m. EST.

Understanding Extended Trading: How Does Extended-Hours Trading Work?

Extended-hours trading is facilitated through Electronic Communication Networks (ECNs), whereas normal hours trading is facilitated through market exchanges. Accordingly, ECNs allow trades to be executed outside regular market exchange hours the same way market exchanges allow trades to be executed during regular trading hours. Therefore, ECNs automatically match buy and sell orders, providing a platform for investors to react swiftly to news or events that occur when traditional markets are closed. The rules governing extended-hours trading can vary significantly between brokerages, with some only permitting trades on specific securities and others requiring that all orders be limit orders. Extended trading is particularly active closer to the opening and closing times of the regular market, with most pre-market trades occurring between 8:00 a.m. and 9:30 a.m. EST and after-hours trades tapering off by 6:30 p.m. EST. Despite the flexibility it offers, extended-hours trading also comes with risks, including lower liquidity and higher volatility, which can impact the execution of trades.

What Is a Trading Session?

A trading session refers to the specific hours during which an asset or market is actively traded. These hours vary depending on the type and location of the market. For example, the U.S. trading session is primarily defined by the New York Stock Exchange (NYSE), where trading occurs from 9:30 a.m. to 4:00 p.m. EST. However, other markets like bonds, futures, and foreign exchange have different trading sessions, influenced by the nature of the asset and regional factors.

Globally, trading sessions are categorised by regions, including the Asian, European, and North American sessions. Each has its own distinct hours, reflecting the working hours of major financial centres in those regions. It's crucial for traders to understand the specific trading hours of the assets they are dealing with, as this impacts liquidity, volatility, and the potential for market movements during those sessions.

What Is an Electronic Market?

​​Electronic markets are platforms that enable the trading of stocks, ETFs, and other securities through digital networks, eliminating the need for physical trading floors. Unlike traditional markets where buyers and sellers mainly interact in person, electronic markets connect participants via high-speed computers and modern communication systems. This setup allows transactions to occur efficiently, regardless of the participants' locations.

One of the earliest and most prominent examples of an electronic market is the Nasdaq stock market. The Nasdaq, launched in the 1970s, operates entirely online, linking investors, brokers, and dealers to facilitate the buying and selling of securities. With the advent of the internet, electronic markets have become increasingly accessible, allowing ordinary investors to engage in online trading through brokerage platforms. These platforms offer features like real-time price updates, portfolio tracking, and instant trade execution, all while reducing costs compared to traditional brokerage services.

The rise of electronic markets has not only revolutionised how trades are executed but also introduced new trading behaviours, such as day trading. While this form of trading can be profitable, it comes with significant risks and tax implications. Overall, electronic markets have expanded access to trading, making it easier for individuals to participate in the financial markets from virtually anywhere.

Example of Extended Trading in the Stock Market

Suppose Apple (AAPL) releases its quarterly earnings report at 5:30 p.m. EST, showing stronger-than-expected results. The New York Stock Exchange has already closed at 4:00 p.m., but an investor, seeing this news, decides to act quickly. Using an electronic communication network (ECN) during extended-hours trading, which runs until 8:00 p.m. EST, the investor places a limit order to buy Apple shares at a specified price. This order is executed at 6:00 p.m., allowing the investor to try to capitalise on the positive earnings report before the market officially reopens the next morning at 9:30 a.m. EST.

What Is Pre-Market Trading?

Pre-market trading refers to the period of stock trading that takes place before the standard market session begins, as early as 4:00 a.m. in the case of the NYSE. This early trading window lets investors react to news and events that happen outside of regular market hours, giving them a chance to place orders before the official opening bell. Pre-market trading is part of a broader category known as extended-hours trading, which also includes after-hours trading, as detailed below.

Pre-Market Trading Benefits

Pre-market trading offers several potential advantages for investors who want to stay ahead of the market. One key benefit is the ability to gauge market sentiment and make trades based on news that breaks before the market opens. For example, if a company releases earnings or other significant news overnight, investors can react promptly by trading in the pre-market session, potentially securing more favourable prices. Additionally, pre-market trading can provide insight into how the broader market might behave once regular trading begins, helping investors to strategize their positions for the day ahead.

Pre-Market Trading Risks

Like many arenas of market activity, while pre-market trading provides opportunities, it also carries risks. One of the main concerns is lower liquidity, meaning fewer buyers and sellers are active during this time, which can lead to wider bid-ask spreads and make it harder to execute trades at desired prices. This reduced liquidity can also result in increased price volatility, with stock prices potentially fluctuating more sharply than during regular trading hours. Moreover, because fewer market participants are involved, prices may not accurately reflect the stock’s true value, leading to potential information mismatches that cause pricing errors. Retail investors should also be aware that some brokers impose restrictions on pre-market trading, limiting the types of orders that can be placed or the securities that can be traded, adding another layer of complexity and risk.

What Is After-Hours Trading?

After-hours trading refers to the practice of buying and selling securities outside of the standard trading hours set by major U.S. exchanges. Typically, these exchanges operate from 9:30 a.m. to 4:00 p.m. Eastern Time, but after-hours trading allows investors to continue trading from 4:00 p.m. to 6:00 p.m., with some sessions extending to 8:00 p.m. This extended trading occurs via ECNs, which enable traders to execute orders without needing to be physically present on the trading floor. Originally, after-hours trading was primarily available to large institutional investors, but the introduction of ECNs in the 1990s opened the door for individual retail investors to participate as well.

After-Hours Trading Benefits

After-hours trading offers several key potential advantages for investors. One of the primary benefits is the convenience of being able to react to news and events that occur after the regular market closes. For instance, a company might release its earnings report in the evening, and after-hours trading allows investors to respond immediately rather than waiting for the next day’s market open. This ability to act on fresh information can create opportunities for advantageous pricing, especially if a stock's price temporarily fluctuates due to new developments. Additionally, after-hours trading enables investors to strategise based on global events, such as political changes or international market movements, that might impact stock prices before the next trading session begins.

After-Hours Trading Risks

Despite its advantages, after-hours trading carries notable risks. One significant concern is the lack of liquidity, as fewer trades are made during these extended hours compared to the regular session. This can lead to wider bid-ask spreads, making it harder to buy or sell stocks at desired prices. Furthermore, individual investors often find themselves at a disadvantage, competing against large institutional investors with greater resources and professional trading expertise. Another risk is the increased price volatility that can occur due to lower trading volumes. Prices may fluctuate more dramatically after hours, leading to potentially unfavourable outcomes for those not prepared to manage the risks associated with these market conditions.

How Pre-Market and After-Hours Trading Affect Stock Prices

Pre-market and after-hours trading can significantly influence stock prices, often in ways that differ from regular trading hours. One key factor is the lower liquidity during these sessions, as fewer investors are active, which can lead to larger price swings with even small volumes of trades. The limited number of participants can result in wider bid-ask spreads, making it more challenging to buy or sell at favourable prices, and potentially causing more pronounced volatility.

Stock prices during extended-hours trading can also shift based on new information that becomes available outside of regular trading hours. For instance, if a company releases an earnings report or other significant news after the market closes, this information can prompt immediate reactions from traders in the after-hours session, driving prices up or down before the next day’s open. These price movements can set the tone for the upcoming trading day, as the stock may open at a different price compared to the previous day’s close.

Additionally, the behaviour of stock prices during pre-market and after-hours trading can provide insights into investor sentiment as traders respond to overnight developments or anticipate market reactions. These early price movements often carry over into the regular trading session, influencing the opening prices and potentially setting the momentum for the day.

If you’re ready to engage in after-hours trading with Plus500, you can open a CFD trading account.

FAQ

What Time Are Pre-Market and After-Hours trading?

Specific hours depend on the market, but using the NYSE as an example, pre-market trading occurs from 4:00 a.m. to 9:30 a.m. EST, while after-hours trading runs from 4:00 p.m. to 8:00 p.m. EST.

Does After-Hours Trading affect Pre-Market Trading?

Yes, after-hours trading can influence pre-market prices by reacting to news and events that occur after the market closes.

Is After-Hours Trading Risky?

Yes, after-hours trading is risky due to lower liquidity and higher volatility, which can affect trade execution and pricing.

What Is an Overnight Trading Session?

An overnight trading session refers to the period outside regular trading hours when securities can be traded, including pre-market and after-hours sessions.

Can prices be more volatile when trading in the extended hours?

Yes, prices can be more volatile during extended-hours trading due to reduced liquidity and fewer participants.