• Friday, March 29, 2024

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Let’s Bust The Most Common Myths About Extended Hour Trading Once And For All

By: Eastern Eye Staff

Most novice stockbrokers involve in trades that occur during “trading hours,” typically 9:30 AM to 4:00 PM EST in the US. Before the advent of electronic forms of trading, all traders had to use this time window to execute trades. However, electronic networks made it possible for investors to carry out trades before and after the regular timings, known as extended-hours trading.

Extended Trading: Definition

Extended trading is of two types: pre-market trading between 4:00 AM and 9:30 AM EST in the US and after-hours trading between 4:00 PM and 8:00 PM EST. Electronic Communication Networks (ECNs) have made it possible for traders to participate in the extended hours to democratize trading.

Typically, most of the action during extended hours occurs close to the market opening or closing time (around 8:30 AM to 9:30 AM and from 4:00 PM to 6:30 PM) since that is when there is a sudden change in the trade volumes. Now that you have a basic understanding of what extended trading is, here are some more myths about this topic that this article explores in detail.

Myths About Extended Hours Trading: True or False?

1. Investors can trade all securities can during extended hours: False

Not all securities have this privilege of extended trading. For example, the futures market has different time slots for extended hours based on the underlying assets, while the US Forex operates 24 hours a day.

You can trade grains and oilseeds with agricultural futures contracts, where electronic trading takes place between 6:00 PM EST Sunday to Friday 5:00 PM with a daily break for one hour from 5:00 PM. Similarly, you can trade commodities like coffee, sugar, cocoa, and cotton between 6:00 PM EST Sunday to Friday 5:00 PM with a daily break from 5:15 PM to 6:00 PM.

There can also be restrictions by specific brokers. Over-the-counter securities may be declared off-limits, and only a few securities will be available for extended trading.

2. Only full-time traders and those belonging to big stock brokerages can participate in extended trading: False

When the concept of extended hours was introduced, only professional traders and institutional stockbrokers took part in trading during that time. Most part-time traders could not afford to trade beyond the regular times because they lacked the knowledge to handle the associated risks (described below).

However, ECNs have made the trading floor open to all traders, part-time and full-time. Every trader has an equal opportunity to buy and sell securities after 4:00 PM but at their own risk. Professional traders typically have access to a larger pool of capital to accommodate price variations and sophisticated trading tools like algorithmic trading.

Some brokerages take steps to protect the novice investor. Some restrict after-hours trading to limit orders only, i.e., a fixed lower limit below which you will not sell and an upper limit beyond which you will not buy. The brokerage mostly moves these canceled trades to the next day’s regular trading session.

3. Limited liquidity and large volatility are some risks associated with extended trading: True

Since only a few experienced traders buy and sell securities during extended hours, the volume of trades is meager. As a result, it gets increasingly difficult to execute trades, leading to a broader bid-ask spread (i.e., the difference between what someone is willing to pay to buy a security and to sell a security respectively).

With prices moving dramatically in a short period, the volatilities of the stocks also rise. The wide variety in rates can have an effect during the regular trading hours the next day as well.

4. Extended trading is not affected by financial news: False

Investors capitalize a lot on the fact that they get to trade during extended hours before the market opens the next day. After the market closes, any financial news gives investors a heads-up about how the market will be the next day so that they can buy or sell stocks accordingly during after-hours.

For example, if a company reports poor earnings, investors can predict that the stock price will fall. Those who trade after 4:00 PM can exit their position before the market opens. Since financial news is accessible to everyone, in theory, anyone can make the most of this opportunity during extended hours.

A similar situation can also occur during the morning hours, especially since global markets operate in different time zones. Economic indicators like the job scenario (the report is issued by the US Bureau of Labor Statistics or the BLS on the first Friday every month) has a massive impact on the market movement.

5. After-hours trades do not affect the opening price the next day: False

The price at which a particular stock closes is not necessarily the same price with which it opens the next trading session if there were some extended-hours trading in that stock. For example, if there are rumors or news features that the price of a specific stock will rise, more investors will want to sell the stock the next morning. This excess supply will lower the rate of the share.

In general, the price movements during extended hours indicate the market sentiment to events that occur after the market closes. However, due to the inherent risks associated with extended trading, this indication should be taken with a pinch of salt.

6. Technology glitches affect extended hours deals: True

Since extended trading is handled entirely by electronic systems, there is scope for technical errors, mainly because there are lesser people available to rectify and fix glitches. Lags and delays in executing orders are the most common issues faced by traders during extended hours. In the worst case, your deals might not get executed at all.

Are You Ready to Face the Market?

Trading in the extended hours is quite complex, and only experienced traders take part in these deals. However, you can always get a taste of what the scenario is like by signing up for a paper trading account online.

You will be given free stocks and virtual money to practice trading strategies and deals to get the experience without losing real money. Once you have gained enough confidence with virtual money, you can enter the actual market.

 

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