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Pre-market and after-hours trading
Did you know that you can trade outside of regular market hours? With extended-hours trading, you can trade before markets open and after they close. If you're someone with a busy schedule, pre-market and after-hours trading may work for you.
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What is pre-market and after-hours trading?
As an investor, it's helpful to know that most stock exchanges in North America are typically open for 5-7 hours on weekdays. The Toronto Stock Exchange (TSX), New York Stock Exchange (NYSE), and Nasdaq (NASDAQ) all share the same regular trading hours – between 9:30 a.m. and 4 p.m. ET, Monday to Friday, except stock market holidays.
The economy, however, is not bound by these hours and important market shifts can occur at any time. This factor and advancements in electronic trading have encouraged markets to enable trading beyond regular hours.
Trading outside regular hours is called extended hours trading. It consists of two sessions:
Pre-market trading usually takes place between 8 a.m. and 9:20 a.m. ET on weekdays (U.S. only).
After-hours trading hours can vary depending upon the brokerage. Typically, it starts at 4 p.m. and runs as late as 8 p.m. ET on weekdays (U.S. only). However, some brokerages may allow clients to execute trades only till 7p.m. ET or even later than 8 p.m. ET.
How it works
The relative shortness of regular trading hours can lead to more efficient markets and less volatility – shorter trading periods give investors more time to analyze business news and information before markets open, which can help prevent rushed trading decisions. However, as trading activity is compressed into a smaller period of time, it can lead to increased liquidity and smaller spreads.
Pre-market trading and after-hours trading generally have less volume – and depending on where you are, they may have different trading rules. Besides low volume, there is also limited liquidity during extended hours, which can lead to increased volatility, larger spreads, and greater price uncertainty. Plus, earning reports are typically announced after regular trading hours which can lead to major price swings.
What are the pre-market trading hours?
Any trading activity that occurs before markets open is known as pre-market. While the TSX does not offer pre-market trading, the NYSE and NASDAQ do. It usually takes place between 8 a.m. and 9:30 a.m. ET on weekdays, but many discount brokers facilitate access to NYSE and NASDAQ pre-market trading as early as 4 a.m. ET.
What are the after-market hours?
After-hours trading, as the name suggests, takes place after the markets close. For U.S. stock markets, after-hours trading starts at 4 p.m. and can run as late as 8 p.m. ET. On the TSX, the post-trading session runs from 4:15 p.m. to 5 p.m. ET.
Accessing extended hours market data
If you have a brokerage account, you can use its information services to access detailed after-hours market trading data. This is usually provided for free.
For example, with TD Direct Investing you can enter pre-market or after-hour orders online using WebBroker or Advanced Dashboard for eligible securities.
If you don't have a brokerage account, there are several sites that offer free access to pre-market and after-hours data.
Why investors engage in pre-market and after-hours trading
Extended trading hours can offer many a number of benefits to investors, as they can use this time to quickly respond to business news or changes in the market. For example, if a company releases a surprisingly favourable earnings report after hours, it could create a demand for shares and a subsequent bump in the company's stock price.
Another scenario could be the influence of overseas markets. Let's say a company with close ties to a market in Asia experiences fluctuations in price - investors trading after-hours may be able to act quickly on this information.
While extended hour trading may give you an advantage, it is important to understand the risks as well.
Risks associated with pre-market and after-hours trading
Liquidity: If there are a large number of orders in the market, the liquidity of a security is considered to be high. However, with very low levels of liquidity during pre-market and after-market hours, there is no guarantee that a certain trade will be executed. The risk is that your order may be partially executed or not executed at all.
Volatility: Change in the price of a security during trading hours is known as volatility. Due to a smaller number of participants in extended hours, trading can be volatile and result in price swings.
The spread: This refers to the measurable difference in price between what a security can be bought and sold for. With lower liquidity and higher volatility, the spread may be wider during pre-market and post-market hours.
Availability: During pre-market and after-hours trading not all stocks are available to trade. Plus, only limit orders are available to investors during these extended hours.
Certain institutional and major investors may choose to simply refrain from pre-market and after-market trading, regardless of market shifts or events. Due to this, it's possible for a stock's price to fall sharply during extended hours trading only to rise when the markets open the following day.
How to trade in pre-market and after-market hours
The procedure is quite similar to trading during regular hours. Simply log into your online brokerage account and select the stock, or stocks, that you wish to trade. The key difference is that instead of placing a market order, you will have to place a limit order. Keep in mind that the bid-ask spread may be wider than it is during regular hours and the stock price may be volatile as well. Additionally, you will have to take into account the different rules that various brokerages have when it comes to trading hours.
On a final note
Pre-market and after-hours trading may be beneficial to investors looking to capitalize on business developments or events. However, there are significant liquidity-related risks to consider. It's a good idea to avoid extended hours trading unless you have a well-defined strategy in place.
The information contained herein has been provided by TD Direct Investing and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.
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