The extended session is trading that happens after the regular market session, which happens every Monday to Friday between 9:30 ET and 16:30 ET. In this article, we will look at what extended hours are and how to take advantage of them.

What are extended hours?

In general, most traders and investors participate in the market, which is open between 09:30 and 16:30 ET. Other investors are also able to buy and sell shares a few hours after the market closes and before it opens. 

The after-hours session starts at 16:30 ET to 19:00 ET, while the pre-market session starts at 08:30 to 09:30 ET. These sessions are watched closely by investors and day traders because they usually provide an indicative price of how a stock will open in the regular session. For example, if a company’s shares are up by 10% in the pre-market, there is a high probability that it will open at that level in the regular session.

How extended hours work

Traditionally, all trading used to happen in exchanges. Most of the trading used to take place at the New York Stock Exchange (NYSE). As a result, buyers and sellers interacted physically. 

Today, most of this trading happens digitally. When you buy a stock, your broker routes the order through a market maker who implements them. Some brokers give you direct market access (DMA), which means that you can see quotes from several market makers. You can then select the best provider.

All this does not happen in extended hours. This is because brokers use a system known as an electronic communication network (ECN) that is also known as an electronic stock exchange (ESE). In this system, your buy and sell orders are matched directly without a middleman. 

Almost all brokers in the US offer extended hours of trading. The most popular ones are Robinhood, TD Ameritrade, Schwab, and Fidelity.

Differences between regular hours and extended hours

There are several differences between extended hours and regular hours. Some of these differences are.

How trading happens

As mentioned above, in the regular session, orders are routed directly through a market maker to the exchange. In ET, they are routed through an ECN. As you will see below, this has its own cons.

Order types

In the regular session, you can use all types of orders. For example, you can buy a stock at the market price, or you can use limit orders like buy and sell limits and buy and sell stops. In extended hours, most brokers only accept limit orders.

Assets available

You can buy and short all types of assets during regular hours. These include companies listed in the NYSE and Nasdaq, International Depository Receipts (ADR), exchange-traded funds (ETFs), bonds, and mutual funds. On the other hand, most brokers provide only Nasdaq-listed entities.

Order sizes

In regular hours, brokers accept all order sizes. This is how hedge funds are able to buy shares worth billions of dollars. However, many brokers have limits on the number of shares you can buy during extended hours. For example, with Fidelity and Schwab, you can only buy 25,000 shares of a single company.

Why trade in the extended session?

There are several reasons why many day traders like to trade during extended hours. First, they do it to take advantage of the news that comes out when the market is closed. 

For example, many companies usually release their earnings before the market opens or after it closes. If a company releases strong earnings, the shares will probably rise and vice versa. If you wait until the market opens, you might miss out on the initial action.

Other top news that comes out in extended hours are mergers and acquisitions (M&A), management changes, and key speeches. 

Second, you can trade in these hours if you are preoccupied during the regular hours. For example, if you have an 8-5 or 9-5 job, you might not have the time to trade when the market is open. 

Finally, as a day trader, having more hours can give you more trading opportunities to make money. 

Cons of extended hours

Extended hours play an important role in the market, as we have highlighted above. However, there are several disadvantages that you need to be aware of. 

ECNs cons

As mentioned above, orders in extended hours are executed through an ECN. Unlike in the regular session, they are not routed through market makers. This means that, at times, you will not get the best price. 

Overnight risks

If you buy shares in the extended session and leave it open, it exposes you to overnight risks. For example, if company A announces it will acquire company B, the immediate reaction is that the share price of company B will spike. 

If the deal is hostile in nature, it means that the company could reject the offer. Therefore, if you are not around, it means that you will lose money when the market opens. 

Low liquidity

In the regular session, when you place a buy order of any stock, you will always find a seller. This is because most investors and traders operate during this time. Also, market makers help ensure that orders are placed. However, there is usually little liquidity during extended hours. This means that the spread between the bid and ask price can be bigger. Therefore, you might not get the best price during this period.

Volatility

The amount of volatility in extended hours tends to be higher than during the regular session. As such, you can lose more money during this period.

Summary

Trading in the pre-market and after-hours is becoming popular these days. As shown above, it has its advantages, such as reacting to news that happen after the regular hours. However, it also has its risks, like low volatility and overnight risks. You can reduce these risks by reducing your leverage and sizing your trades well.