What is Pre / Post Market Trading?
Pre / Post Market Trading Overview
The stock market has normal trading hours. The market is open for regular trading between 9:30 a.m. and 4 p.m. Monday - Friday (with the exception of nationally recognized holidays). What traders may not know is that the stock market is also open for business before and after regular trading hours. Pre- market trading allows investors to buy and sell stocks between 4 a.m. and 9:30 a.m. Post-market trading allows investors to buy and sell stocks between 4 p.m. and 8 p.m.
There are billions of shares traded during normal trading hours. However, pre- and post-market sessions trade only a small fraction of that volume, which can present both challenges and opportunities.
Corporate Announcements
Corporations are strategic when it comes to announcing important information such as earnings. Making announcements during a normal trading session could cause a sudden shift in opinion that could irrationally impact the real value of the stock. This is why most earnings announcements are made before or after normal market hours. For example, if a company announced earnings during normal trading hours and the numbers were lower than estimated, it could result in an irrational shift out of the company’s stock, resulting in large losses.
However, the value of the stock can still move even when the market isn't open. Investors want access when that value changes, which is why pre- and post-hours sessions are so important. So if you trade when these announcements are made you're better able to react to the news. Once the market opens, share prices will have already changed, causing the stock price to better reflect fair value.
Economic Announcements
Many economic announcements are released around 8:30 a.m. EST, an hour before trading begins. Market reaction to these announcements can cause large swings in price, setting the stage for the coming trading day.
For example, GDP numbers (Gross Domestic Product) are announced towards the end of each month and before regular trading begins. When the GDP numbers are above or below expectations, there are usually swings in the market.
Liquidity Issues
Historically, pre- and post-market trading was only available to large investors, such as mutual funds and hedge funds. Everyday investors were not able to trade during these times. That has changed now that markets have become computerized and online brokerages are widely available.
Now that the everyday investor has access to these markets is it a good idea to trade in pre- and post-hours sessions? The main thing to keep in mind is that these markets are less liquid, which means that there are far fewer people trading and far fewer shares available to trade so you may have difficulty buying or selling your stock. For example, if an after-hours earnings announcement is worse than expected and you want to sell your shares quickly, you might not be able to — this is especially true with smaller companies.
Spreads and Volatility Concerns
Another thing to consider in pre- and post-hours trading is the bid and ask spread. The spread is the difference between the price at which a buyer is willing to pay and a seller is wiling to sell. In pre- and post-market hours the spread will be wider. Therefore, you may have to settle for a price that doesn't reflect fair market value.
Also, pre- and post-hours trading sessions consist mainly of professional traders and the volume of shares traded is low, so there is price volatility. One large trade could have a significant impact on the price of a stock.
Compare and Contrast
If you decide to trade during pre- and post-market sessions, your trading option may be limited.
During regular trading hours:
Trade on exchanges such and the NYSE and Nasdaq.
Execute a variety of order types.
Trade a variety of security types, such as stocks, options, bonds, and mutual funds.
During pre- and post-hours:
Trades happen through an electronic market, not on the major exchanges.
Only limit orders are accepted with a maximum of 25,000 shares per order.
Most listed securities are available.
Orders are only good for the pre- or post-hours session and cannot be carried over to the next trading session.
There may be delays in getting your orders filled.
How to Trade After Hours?
Contact your brokerage. Most brokerages have access to pre- and post-hours trading for their customers.
Pre / Post Market Trading Conclusions
Pre and post market stock trading can be beneficial if trying to profit on breaking news. With this in mind, trading before or after regular hours is not recommended for most traders. Regular trading hours offer more liquidity and efficient markets, bringing share prices more in line with fair value.
-Happy Trading, Verdia