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Understand the impact of long-term trading on the total market




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Understand the impact of long-term trading on the total market
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The US stock market remains open for business for six and a half hours, that’s from 9:30 a.m. to 4:00 p.m. ET.

Wall Street remains busy during general trading hours; However, some investors find it less busy to trade in the before and after hours trading sessions, often referred to as the extended hours trading.

These trading sessions have both advantages and disadvantages as the general behavior of the market varies widely.

Extended Hour Trading – A Detailed Guide

Trading in the extended hours session takes place over electronic communication networks (ECNs) that connect potential buyers and sellers without implementing a traditional stock exchange.

Long-term trading is more volatile and carries a higher risk. Prices fluctuate widely during extended hours, and the next day opening value may not be the same as in the extended hours market.

Trading outside regular opening hours has long prevailed; however, it was once only the domain of wealthy investors or institutional investors such as mutual funds.

Understand the impact of long-term trading on the total market

This idea changed after the emergence of ECNs as it allowed individual investors to participate in after-hours trading.

Members of the Financial Industry Regulatory Authority (FINRA) can now freely enter quotes during the extended hours sessions, but must comply with all applicable limit order protection and display regulations.

Alpaca is a technology company that makes asset management operations around the world modular.

To learn more about extended hour trading, visit Alpaca and use it as your trading platform as it can give you insightful information while trading.

Stock trading sessions

There are three markets where you can trade stocks:

  • Trade before the market – 4:00 a.m. to 9:30 p.m. ET.
  • Trade on the regular market – 9:30 a.m. and 4:00 p.m. ET.
  • After-hours market – 4:00 pm to 8:00 pm ET.

Both the pre-hours and after-hours markets function in the same way as the regular market; however, the shares traded between the parties follow the agreed price.

In simpler words, the price you receive is the price someone is willing to pay in the after-hours or pre-market.

Stock price variations during long trading hours

Extended hours trading is not the same as normal trading in the market as both the terms and the risks vary.

The US Security Exchange Commission has warned investors to be wary of the risks of trading securities in the extended hours.

The market conditions in the extended hours fluctuate and so traders should know the following points –

1. Dealing with orders to trade

You may not always be able to access the best possible displayed price while executing a trade in the extended hours.

Many companies publish their earnings before or after the market closes. The underlying value of a stock is in constant flux regardless of whether the market is open or not, and people want to enter the market when the net asset value is shifting.

People want to gain the upper hand in the competition by responding directly to news announcements that happen when the mainstream market is not yet open.

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2. Minimal liquidity

Long-term trading carries the risk of pitiful liquidity, meaning that there are not enough buyers or sellers available to ensure a fair price for a trade.

However, during regular trading hours, the market is full of buyers and sellers, and there are many trading partners, which increases the chances of getting your desired trading price.

As the SEC says, Main Street investors with lower trading liquidity risk higher trading costs, increased uncertainty about prevailing securities prices, and also experience deterrents when executing trades.

You need to be careful when trading stocks in the extended hours, which is where Alpaca can help you understand how to be careful without incurring unnecessary losses.

3. Wider trading rate spreads

In prolonged trading, the scarcity of traded securities and less demand to trade can cause wider quote spreads (the distinction between the bid and ask price on a security).

Large quota spreads reduce the likelihood of your buy or sell order being executed and the trade price you expected on the trade to be uncertain compared to standard trading hours.

4. The volatility of trade prices

Fewer securities that can be traded during the extended hours imply more dramatic price movements compared to securities that are traded during daytime trading sessions.

Investors looking to trade securities during extended hours can rest assured that trading prices will differ significantly from regular trading hours, primarily due to high volatility.

5. Limit Orders Only

Brokerage firms only allow the execution of limit orders in the extended hours at the limit price or higher, as stated by the SEC.

Investors with longer opening hours should realize that if the price deviates from the limit order, that transaction will be removed from the table and the established regulations do not allow any transactions.

If an out-of-hours trade is not executed overnight, the investor should confirm with the brokerage firm and see if it is automatically executed on the next trading day when the markets reopen.

Other variations in the market

Prices are subject to change in the extended hours market. Once the regular market opens, the stock may not open to the same value that traders have invested in it in the after hours market.

For example, if a stock’s price rises in the market after hours due to a rumor of increased sales, there may be many investors who want to immediately sell in the open market.

Such a rush in trading activity would increase selling pressure and lower the price of the stock compared to the previous day’s off-hours level.

The price changes observed in the after-hours market are insightful to determine how the market reacts to the latest information released after the regular market has closed.

However, price changes outside of business hours can be more volatile than prices during regular hours, so you should not rely on them as an accurate impression of where a stock will be trading once the next regular session opens.

Final words

If you decide to trade in hours of trading, contact your broker or trading platform and inquire about any special regulations that may apply to your trading practices.

Just remember that there are significant risks involved due to the high volatility of the market during the hours of trading.

Check with your broker to check if they offer after hours trading as well as the requirements necessary to qualify for extended hour trading.

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