Traditionally, investors could only buy and sell stocks, bonds, currencies and other financial instruments during business hours. With the advent of electronic trading, however, certain financial products can be bought and sold any time. While pre-market and after-market trades can be profitable, they do have drawbacks, and understanding the risks and limitations is crucial before you attempt to trade financial instruments outside of regular trading hours.
The NASDAQ and the New York Stock Exchange, the two major stock markets in the U.S., are open for business between 9:30 a.m. and 4 p.m. EST. This time period is referred to regular trading hours or simply regular hours. When a financial publication talks about the closing price of a stock, it is referring to the last price at which the stock changed hands during this time period. For any major stock, transactions will occur until the last minute. For thinly-traded stocks, also known as illiquid stocks, the closing price may be from a trade several minutes earlier, as the last trade might have occurred at 3:54 p.m., for example.
Extended Hour Trades
Today, you can trade stocks outside of regular trading hours through what are known as ECNs or Electronic Communications Networks. These are large databases where software programs match buy and sell orders. When you place an order to trade stock on the website of your broker after regular hours, say at 5 p.m. EST, you will be asked if you'd like to trade immediately or wait until the market opens on the following day. If you elect to trade immediately, your broker will feed the order into the ECN and provide a trade confirmation when the order is executed. The term "extended hours trading" covers the entire day that falls outside of regular trading hours, and the basics apply to both pre-market and after-hours trades.
While most of the trading usually occurs during regular hours, after-hours trading can get quite intense during the period surrounding earnings releases. Firms make their financial information pubic four times a year, releasing quarterly income and balance sheet information. Such releases almost always occur either shortly before the market opens or soon after the market closes. Right after these figures are announced, a large number of trades will occur as disappointing investors might rush to dump the stock or a pleasant surprise results in a flood of buy orders. These chaotic times can be dangerous, especially for a novice trader. Investors without sufficient experience should refrain from trading until the stock price finds somewhat of an equilibrium and trading activity somewhat settles, which tends to occur during regular trading hours.
Even during an ordinary day, where the stock's issuer has not released any significant information, after-hours trading carries significant risk. Since fewer investors buy and sell shares during this period, especially very late at night, prices tend to move more erratically than when the stock market is open -- the prices of smaller stocks can move up or down for no reason other than a single large investor placing a big order. Furthermore, regular news services may be late in reporting critical events at odd hours and you may trade a stock without access to the latest information that other market players might have gotten.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.