The ability to buy and sell securities outside regular trading hours may seem like a welcome advantage. However, greater flexibility also brings risks that investors should understand before placing an order.

What Is Extended-Hours Trading?

Selected securities can be traded before the main trading session opens during pre-market hours and after it closes during after-hours trading. This is not a separate market, but rather trading in the same assets under different conditions. Available trading hours and securities depend on the particular exchange and broker.

Why Investors Trade Outside the Main Session

Extended-hours trading allows investors to respond to information released while the main trading session is closed. This mainly includes corporate earnings, company announcements, rating changes, macroeconomic data, and geopolitical events. However, reacting more quickly does not automatically result in a better trade (you can learn more about the risks associated with trying to time a purchase correctly in our previous article).

Lower Liquidity Makes Trading More Difficult

Liquidity indicates how easily a security can be bought or sold without significantly affecting its price. Outside the main trading session, there are usually fewer market participants and orders, meaning an order may be executed only partially, at a less favorable price, or not at all. This risk is particularly pronounced for shares of smaller and less actively traded companies.

Wider Spreads Increase Costs

Lower liquidity also leads to wider bid-ask spreads—the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. As a result, an investor may buy a stock at a higher price or sell it at a lower price than during the main trading session. The spread therefore represents an indirect transaction cost even if the broker does not charge a separate fee.

Prices Can Fluctuate Sharply

A smaller number of orders means that even a relatively small trade can move the price significantly. Sharp fluctuations often occur after companies release their earnings, but the initial reaction may reverse completely once the main trading session opens (we explain how to respond to a more substantial decline in an investment portfolio in our previous article). Moreover, the displayed price may reflect only the most recent trade and may not correspond to the price at which the security can currently be bought or sold.

A Market Order Can Bring Surprises

A market order prioritizes rapid execution but does not guarantee the final price. Low liquidity and a wide spread can therefore result in significant price slippage. A limit order offers greater control by allowing the investor to set the maximum purchase price or minimum selling price, although its execution is not guaranteed.

Conditions Vary Between Brokers

Brokers may offer different trading hours, supported assets, order types, and fees. An order may also remain active only during a specific trading phase and expire automatically once that phase ends. Investors should therefore review their broker’s rules and order execution procedures in advance.

When Extended-Hours Trading Makes Sense

This option may be particularly useful for more experienced investors who need to respond to a specific event. However, long-term investors generally do not need to act immediately after every announcement. If they decide to trade, they should check liquidity, the spread, the order type, and an acceptable price, because having the ability to trade for longer does not mean it is always wise to do so.

For more investment trends and useful tips, explore our previous articles on AxilAcademy.