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Extended-hours trading

Key takeaways

  • After-hours trading occurs immediately after the market is closed, while pre-market trading occurs before the market opens.
  • It allows you to react to news events before many other investors.
  • The risks are substantial and worth careful consideration.

In the US, the opening bell is at 9:30 a.m. Eastern Time and the closing bell is at 4:00 p.m. Eastern Time. Unfortunately, many investors are busy with life during those hours. But did you know you can place orders when the market is closed?

What is extended-hours trading?

After-hours trading refers to the period of time after the market closes and during which an investor can place an order to buy or sell stocks or ETFs. Pre-market trading, in contrast, occurs in the hours before the market officially opens. Together, after-hours and pre-market trading are known as extended-hours trading.

The rules for extended-hours trading differ from the rules during normal trading hours. Moreover, each brokerage firm may have different rules pertaining to trading during non-market hours. For example, with a Fidelity brokerage account, you can only place certain types of orders during extended-hours trading—including buy, buy to cover, sell, or short-sale orders. Also, all orders must be limit orders; orders in the pre-market session can only be entered and executed between 7:00 a.m. and 9:28 a.m. Eastern Time, and short sale orders are available only from 8:00 am to 9:28 am Eastern Time. Orders in the after hours session can be entered and executed between 4:00 p.m. and 8:00 p.m. Eastern Time.

Further, when granting customers the permission to trade during extended hours, most brokerages require their customers to agree to the Electronic Communication Network (ECN) user agreement and even discuss it with a representative so that they understand the risks associated with extended-hours trading. ECN refers to 1 or more electronic communications networks to which an order may be submitted for display and execution by a broker. ECNs electronically match buyers and sellers to execute limit orders. Extended-hours session orders may also be executed by a dealer at a price that is at or better than the ECN's best bid or offer.

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What are the potential advantages?

The main benefit of extended-hours trading is that it extends the availability to trade beyond the traditional window (i.e., from 9:30 a.m. to 4:00 p.m. Eastern Time). Extended-hours trading has become more popular with active investors in recent years because it allows for trades to be made at more convenient times.

For example, traders can use after-hours trading to respond to news events that occur outside of normal market hours. Because many public companies release quarterly earnings after 4:00 p.m. Eastern Time, investors have the opportunity to immediately place a trade following an announcement in order to manage their position, rather than be forced to wait until the market opens the next day.

On the other hand, investors may make pre-market trades upon getting news. A good example is the highly significant monthly US employment report, which is released at 8:30 a.m. Eastern Time on the first Friday of every month. Rather than having to wait until the market opens at 9:30 a.m., an active investor could manage their position immediately after the announcement, if desired. 

What are the risks?

Of course, there is no guarantee an order will be filled in extended hours. The biggest risk associated with extended-hours trading is the potential lack of liquidity. The vast majority of trading occurs during normal business hours, meaning that there is more demand for stock you are selling, and more supply of stock you want to buy.

The primary implication of lower liquidity during extended hours is that the size of bid-ask spreads may be impacted. This can be costly.

To illustrate how this might impact your profitability, consider an example where you would like to sell 100 shares of a stock, so you place a limit order to sell at $55. During normal market hours, there might be hundreds or thousands of traders willing to buy your 100 shares at $55. During extended hours, however, there might only be a handful of traders interested in your shares at all, and the highest bid might only be $53.50.

Basically, you want to sell your shares for $55, but the most someone is willing to pay is $53.50. If you wanted to sell the shares right away, you would have to accept less money for the shares than you might be able to get during normal market hours, when there is more liquidity in the market. If you chose to keep your limit order price at $55, the possibility could exist that your order may not be executed, in whole or in part.

Other risks include price volatility (which tends to be much higher in extended-hours trading than during normal market hours), stronger competition (greater percentage of professional traders who are more skilled at seeking best price execution for themselves), and trading limitations imposed by your broker (which can vary). While this list is not an exhaustive list of all the risks associated with trading during extended hours, they are among the most important factors to consider.

Is extended-hours trading right for you?

At Fidelity, you can trade listed equities and OTC equities—excluding pink sheets and bulletin board stocks (i.e., those that are not listed on an exchange)—during extended hours. Whether you choose to trade during extended hours depends on your investing style, objectives, and tolerance for risk. If you’re focused on building a diversified portfolio of high-quality stocks, bonds, and other investments, and are not comfortable with the heightened risks involved, you might be better off executing trades during normal market hours. 

Extended-hours trading is not for everyone, so you may want to learn more about it and discuss the risks and potential advantages with an investment professional before trying it out. But if you see advantages in being able to trade when the market is closed, you may want to investigate extended-hours trading.

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More to explore

You can place brokerage orders when markets are opened or closed. However, orders placed when the markets are closed are subject to market conditions existing when the markets next open. Any equity requirement necessary for trade approval will be based upon the most recent closing price of the security that you intend to buy or sell. Because of fluctuating conditions, the ultimate execution price may differ at times from the most recent closing price. When placing orders when markets are closed, carefully consider any limitation you may wish to place on the transaction. Fidelity reserves the right to refuse to accept any opening transaction for any reason, at its sole discretion. See more information about trading during extended hours.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917