What Is Extended Trading?

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DEFINITION
Extended trading is the trading that takes place before and after normal stock market hours.

Extended trading is the trading that takes place before and after normal stock market hours. While the markets might be officially closed, trading can still take place earlier in the morning or later in the evening through other trading systems.

Learn how extended trading works and how investors can benefit from making trades outside of normal stock market hours.

Definition and Examples of Extended Trading

Extended trading is the activity of trading securities before or after official stock market hours.

In the U.S., stock exchanges like the New York Stock Exchange (NYSE) and the NASDAQ have official trading hours of 9:30 a.m. to 4 p.m. ET, which are marked with the opening and closing bells. Yet in some cases, you can still buy and sell stocks outside of these regular trading hours.

  • Alternate names: Extended-hours trading, pre-market trading, after-hours trading

For example, if a company releases its earnings report shortly after the 4 p.m. E.T. closing bell, you might want to buy this stock right away, rather than waiting until the next day to take advantage of price trends.

You can place an order through your broker during extended trading hours. Keep in mind that this is not a reservation to buy the stock the following day. If you place an after-market trade, that stock will be yours as soon as it goes through.

The exact hours of extended trading can differ among brokers and exchanges, but they generally run a few hours before and after the official stock market hours. Through NYSE Arca, for example, brokers can place trades during the extended hours of 4 a.m. to 9:30 a.m. ET as well as 4 p.m. to 8 p.m. ET.

How Does Extended Trading Work?

Extended trading generally works by brokers routing orders through what’s known as electronic markets—such as an electronic communications network (ECN)—as opposed to traditional exchange trading. ECNs can be operated by financial services firms like broker-dealers or exchanges. NYSE Arca, for example, is an ECN.

The exact hours of extended trading are up to the electronic market provider. Still, brokers might then implement more restrictive hours for retail clients. In other words, even if NYSE Arca is open until 8 p.m. ET, your broker might only allow you to place after-market trades until 6 p.m. ET.

Risks To Consider

Extended trading can bring more opportunities for investors, but you must also consider their additional risks.

For one, extended hours often involve lower liquidity and higher volatility. During the day, both individuals and institutions are often actively buying and selling stocks. But before the market opens and after it closes, fewer trades tend to take place. This means each trade can have a larger impact on stock prices, causing more dramatic swings than trades that take place during busier market hours.

Lower liquidity can make it harder for trades to go through. You might put in an after-hours order, but if no one is available on the other side of that transaction, you won’t be able to execute it.

Bid-ask spreads might be wider during extended-hour trading. During normal trading hours, plenty of sellers might be available to meet your bid price of, say, $100 per share. With fewer sellers around during after-hours trading, however, perhaps the lowest you could buy the stock for is, say, $100.10 per share—even if that’s more than what the stock trades for during normal hours.

Regardless of the downsides compared to trading during regular market hours, many investors still like to take advantage of extended trading hours as there are plenty of reasons to trade before the opening bell or after the closing bell. Some want to trade on after-hours news, while others, for example, may want to put in a limit order that didn’t fill during the day.

Pros and Cons of Extended Trading

Pros
  • More time to make trades

  • Can react to news outside of normal trading hours

Cons
  • May not get the best pricing

  • Orders might not go through

  • Pricing can be more volatile

Pros Explained

  • More time to make trades: Trading before or after the regular market hours gives you more time in the day to make trades.
  • Can react to news outside of normal trading hours: You can trade directly following an after-market earnings announcement, for example.

Cons Explained

  • May not get the best pricing: Different order routing practices and wider bid-ask spreads, for example, can affect the stock prices you buy and sell during extended trading.
  • Orders might not go through: Due to low liquidity, you might not be able to find a buyer or seller.
  • Pricing can be more volatile: Lower trading volumes can lead to more dramatic price swings.

What Does Extended Trading Mean for Individual Investors?

Individual investors should consider the risks of extended trading before engaging in this activity. If you’re comfortable with the risks and want the option to make trades before or after stock markets officially open or close, check your broker’s extended-trading policies.

One option, which might be required by your broker, is to place limit orders instead of market orders. With limit orders, you specify the exact price at which you’re willing to make the transaction. So if you put in a limit order to buy a stock for $100, you won’t pay more than that for it.

Key Takeaways

  • Extended trading enables investors to trade before and after official stock market hours.
  • Brokers can have varying hours as to when they allow for extended trading.
  • Lower liquidity and higher volatility are some of the risks of extended trading.

Article Sources

  1. U.S. Securities and Exchange Commission. “Investor Bulletin: After-Hours Trading,” Page 1. Accessed Jan. 6, 2022.

  2. New York Stock Exchange. “NYSE: Holidays and Trading Hours.” Accessed Jan. 6, 2022.

  3. New York Stock Exchange. “NYSE Market Information.” Accessed Jan. 6, 2022.

  4. Robinhood. “Extended-Hours Trading.” Accessed Jan. 6, 2022.