Trading in the Pre- and Post-Market Sessions

The stock market is open for business between 9:30 a.m. and 4 p.m. Monday to Friday. Billions of shares are traded in the American markets, making them very liquid and efficient.

However, the stock market is also open for business before and after regular trading hours for those who want to invest based on a company announcement or new economic data. Trading sessions in the pre-and post-market allow investors to trade stocks between 4 a.m. and 9:30 a.m. during pre-market trading and 4 p.m. to 8 p.m. in the post-market session.

Company Announcements

Companies are strategic about how they announce important information like earnings reports. Announcements during regular trading sessions may cause a large knee-jerk reaction that misrepresents the true value of the stock. But the value of the stock can still move even when the market isn’t open.

Investors will want access when that value changes, which is why after-hours sessions are so important. Those who trade when these announcements are made can react to the news. Once the market opens, share prices will have already changed, causing the stock price to better reflect fair value.

Economic Indicators

Many economic indicators are released at 8:30 a.m. — an hour before trading begins in New York. For example, the jobs report issued by the U.S. Bureau of Labor Statistics (BLS) — released on the first Friday of every month — impacts the market. When the data comes above or below expectations, traders can expect volatility in the market. Market reaction to these indicators can cause big movements in price, and therefore, set the tone for the trading day.

Liquidity Limitations

The Securities and Exchange Commission (SEC) advises that after-hours markets are less liquid. Because there are far fewer people trading, investors may not be able to sell their stock. If an earnings announcement is worse than expected, sellers may be affected.

Wider Spreads, Higher Volatility

The bid-ask spread may be affected in after-hours trading. The spread between the two prices might be wide, meaning a small number of traders haven’t agreed on a fair price. Therefore, investors may have to settle for a price that doesn’t reflect fair value.

Most brokers have access to after-hours trading for retail investors, however may have limited access. The SEC advises investors to read all disclosure documents before proceeding.

Limitations After Hours

Brokers may place limits on trades after hours. According to Charles Schwab’s extended-hour overview, there are key differences between standard trading and after-hours trading. During the regular trading day, traders can expect:

• Trading on exchanges.
• To execute many order types and restrictions at any order size.
• A variety of security types including stocks, options, bonds, and mutual funds.
• Traders have different time limits available to them.

Compare that to the brokerage’s after-hours session:

• Trades happen through an electronic market.
• Only limit orders are accepted with a maximum of 25,000 shares on one order.
• Most listed and NASDAQ securities are available.
• Orders are only good for the particular session in which they are placed and are not good for carryover into the next trading session.

How Has Digital or Computer Trading Affected After Hours Trading?

Pre- and after-hours trading used to be one of the benefits of being an institutional investor. Retail investors did not have access, but that changed when the markets transitioned to computerized trading. Retail investors now have remote access to these markets.

Why Are Prices More Volatile in After-Hours Trading?

Because after-hours sessions are largely made up of professional traders and the volume is low, higher price volatility may be present. This may make it more difficult to know when to buy or sell. One large trade by a large firm could have a significant impact on the price of a stock.

What Is the National Best Bid and Offer (NBBO)?

The SEC requires brokerage firms to fill customer orders at the best price at the time of trade, the National Best Bid and Offer (NBBO), during regular trading hours. The NBBO requirement doesn’t apply to extended-hours trading so investors may receive an inferior price in one extended-hours trading system than in another.

The Bottom Line

After-hours trading may have benefits for traders trying to profit from expected news, or it may provide a means of entering or exiting the stock if unexpected news is announced. The regular trading sessions offer better liquidity and more efficient markets, which makes all prices more reflective of fair value. It’s important to understand that different brokerages have different rules on trading hours.