Following the U.S. stock market’s close on January 31, 2017, Apple Inc. reported its first revenue increase in four quarters. The news sent shares soaring 6.1% by the end of the next trading day.1
But investors who waited to buy Apple stock until the market opened on February 1 enjoyed only a small part of the climb. That’s because the majority of the gain—4.7%—was captured during the market’s extended hours, the period of time between the close of one trading day and the open of the next (4:00 p.m.–9:30 a.m. Eastern Time).
Even though you can trade nearly anytime day or night, a lot of the extended-hours action occurs during so-called after-hours (4:00 p.m.–8:00 p.m.) and premarket (4:00 a.m.–9:30 a.m.) trading. These times are particularly active because many companies report their earnings shortly after the close so that investors can absorb the news before the next open, while the U.S. government often releases economic figures in the hours preceding the opening bell.
The principal benefit of extended-hours trading is that investors can potentially get ahead of dramatic price moves before the market opens. Technical traders, for example, often use closing price and volume figures to calculate trading “signals”—signs that it’s a good time to buy or sell a particular security. Thanks to extended-hours trading, such traders can take action immediately rather than waiting for the next open, when prices can be substantially off the previous close.
And, of course, extended-hours trading is convenient for people with commitments that prevent them from trading during regular market hours. Previously, they would have had to place buy and sell orders that would be executed the following day, often at a much different price than anticipated.
It’s not just the time of day and potential benefits that separate extended-hours trades from those made during the regular session. There are also key differences in the way such trades are handled that can make them riskier than their market-hour counterparts. Among them:
- Limited order types: Traders can use only limit orders to buy, sell or short securities during extended-hours trading. Without the downside protection of stop and stop-limit orders, traders must monitor their trades much more closely and be prepared to immediately place an order if the price approaches the stop they have in mind.
- Less liquidity: There are far fewer buyers and sellers during extended-hours trading, which can cause orders to be delayed, partially filled or not filled at all.
- Wider spreads: With fewer buyers and sellers, the spread, or difference between the bid and ask prices, is often wider, making it tougher for your order to be executed at a favorable price.
- Increased volatility: Less liquidity and wider spreads in turn can cause larger price swings. And while that extra volatility can generate some appealing prices, trades can also get away from you much faster.
Adjusting your strategy
If, after weighing the risks against your goals, you do decide to participate in extended-hours trading, consider making some adjustments to your trade plan. Specifically:
- Reduce your order size: Because of reduced liquidity, wider spreads and increased volatility, your orders won’t always go as planned. One way to counter this risk is to reduce the size of the positions you trade during this time.
- Check trade volume: Some stocks can trade so thinly after hours that they aren’t worth your time, while even relatively actively traded securities can be below optimal volumes in comparison to those during regular market hours. In other words, choose your securities wisely.
- Be informed: If you’re trading around an event or news release, make sure you understand the difference between true market-moving news and the kind of noise that can lead investors astray. If you’re unsure, it might be best to wait for a clearer trading opportunity to present itself.
Extended-hours trading at Schwab
1Mike Bird and Aaron Kuriloff, “Apple Shares Push Up Tech Stocks,” The Wall Street Journal, 02/01/2017.