It’s a bright and sunny morning. You wake up and the opening bell sounds, the stock market has just opened up (930am eastern time)! You check your stocks and notice that one has opened 2% higher than the previous close. How can that be? How is it possible that this stock gapped up 2% when the market was not even open??
The answer is from trading that occurred in the premarket or after hours session.
As a broker, I spoke with many clients who were unaware of these sessions and were baffled when I told them that there was addition trading going on beyond normal market hours (930am-4pm eastern). In this article, I am going to be explaining when the premarket and after hours trading occurs and how you can participate.
When are the sessions?
- 4am-930am eastern time
- 405pm-8pm eastern time
How can I trade in the sessions?
All premarket and afterhours trading is done through limit orders. If you do not recall what a limit order is check out my article, Putting Your Account on Autopilot. Basically with a limit order, you specify a specific price for the stock you are looking to trade. Limit orders guarantee you price but they DO NOT GUARANTEE EXECUTION. There are no market orders in these sessions.
- Liquidity-While trading in these sessions does occur, usually the volume(amount of shares traded) is a fraction of what is traded in the regular session. Some stocks do not have any volume at all (no shares are traded). Since limit orders do not guarantee execution you will sometimes have a problem getting your ordered filled. If your order does not fill in the session, it will automatically be cancelled at the start of the regular session.
- Wide Spread- Recall that the spread is the difference between the bid price and the ask price for a stock. Because of the limited number of shares traded in these sessions, you will often see wide spreads that are not advantageous to you as a trader. Usually spreads are roughly a penny but in these sessions you will see them up to a dollar or more.
- Volatility- A stocks price will jump around greatly in these sessions rather than moving up systematically as we typically see in the regular session. For this reason you could buy into a stock at one price and then see it gap down over a dollar almost immediately.
Looking for Quotes
Stocks trading in the premarket or after hours session will have separate quotes than in the regular hours. Your trading platform should provide you with extended sessions quotes that give you bid, ask, and last trade. If you cannot find them or do not have a trading platform that provides these quotes, you can always go to Nasdaq.com and look them up on the left hand side after you type in a symbol.
Why is there risk to buy and hold?
In the beginning of this article, we woke up to a stock that had gapped up 2%. That’s an awesome way to start the day! Unfortunately, one of your stocks could just have easily gapped DOWN 2% as well. There are a myriad of reason why stocks can gap up or down in the extended sessions but here are the most common reasons in my opinion:
- Earnings Announcement– companies announce their earning for the quarter ALWAYS before market open or after market close. For this reason, a stock will gap up or down based off of the results.
- Company Announcement– besides earnings, a company can come out with news that will drive a stocks price up or down such as a new product launch, FDA approval of a drug, or a merger with another company.
- Economic Event– economic events can cause a change in the demand of a company’s products or services. This could be something to do with a change in government or a natural disaster. For instance, after Trump was elected as president, steel stocks shot up because of his plans for that sector.
The inherent risk to buying and holding a stock is for a severe gap down in the extended hours. When this happens there is not much you can do about it. The stock will usually move so quickly that even if you sold out in the extended hours, you would still be taking a loss. I believe since this happens on small occasions, it is a calculated risk that you have to take on. If you long-term approach is to hold the stock for a good period of time then these dips shouldn’t matter to you anyway. Check out my article, When is the best time to invest?!
Homework: Understand when extended hours trading occurs and how big announcement can affect your investments. If you want to trade in the extended hours be aware of the risk involved and always check the volume to see how easily it would be for you to exit the position if you needed to.