Extended trading is a form of trading that takes place either before or after the actual trading day timings of the stock market. This kind of trading takes place through electronic networks and is known as electronic trading hours. Since this trading occurs before or after the trading day, it is known as pre-market trading or after-hours trading.
What is extended trading?
Extended trading can take place during pre-market timings as early as 4:00 am and after trading hours as late as 8.00 pm. Unlike the regular trading hours, extended trading has a lower trading volume.
However, in some cases, there could be an increase in the volume of a few stocks during extended trading. In addition, volatility of stock prices is high during extended trading hours as compared to regular trading.
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Benefits of extended trading hours
Sometimes, some vital information is released after the regular trading hours. This information may cause sudden changes in the market.
Extended trading aids the investors to respond quickly to that news even when the stock market is closed for trading. This method allows the investors to trade immediately and make gains instead of waiting till the next day’s regular trading hours.
The changes in stock prices during extended trading are highly unpredictable. However, there could also be appealing stock prices during the extended trading. So, one may even find good pricing opportunities during the after-hours trading .
As one would expect, there is less crowding during the extended trading hours. This works as an advantage for the investors to trade based on new information released after the trading day.
Risks involved in extended trading
Firstly, there is a risk of liquidity during the extended trading hours. Liquidity is based on the number of buyers and sellers willing to trade at a given point of time. It also takes into account the speed with which the trade is completed.
Since the extended trading hours are post or pre-trading days, the number of buyers and sellers involved in such trading is less. This leads to a decline in liquidity during the extended trading hours.
These trading hours also have less volume and this further causes heavy fluctuations in the prices of various stocks.
For instance, a company X announces news after a trading day that induces the investors to buy more of that company’s stocks. This will cause an increase in demand for those stocks and accordingly, the prices of those stocks rise immediately for the period of extended trading hours.
Moreover, at times the prices of stocks during extended hours are nowhere close to those of a regular trading day. This means that in a few cases the prices rise during extended hours and fall to normal or even lower during the next trading day. This means there is an element of uncertainty of stock prices during extended trading.
One of the key risks lies with the participants themselves as most of the traders during extended hours are institutional investors. These investors are well-equipped with resources and capital. If a retail investor wants to trade during these hours, they may face stiff competition from these large investors.