What Are Pre-Market and After-Hours Trading?

As I was writing this letter, I realized how dope it must be to live in the Pacific Time Zone. Waking up to college football at 9am and being able to finish all the late-night games by 8pm is a blessing. Eastern Time Zone blows.

There are some things the US is good at, and there are some we’re bad at.

Opportunities to live out your dreams, hot dog eating contests, and the general freedoms we enjoy as Americans all fall on the good side of the list.

Although it’s gotten better since the rise in remote work and self-care initiatives (#treatyoself), we’re generally bad as a country at work-life balance.

As is the American way, US stock exchanges followed suit in 1991 and decided that the normal 9:30am to 4pm (ET) stock trading hours weren’t going to cut it and that we needed to extend trading hours to keep up with the pesky Brits and Chinese that were trading while we were sleeping.

Who needs work-life balance, anyway?

So pre-market and after-hours trading were born.

Pre-market trading normally happens from 8am to 9:30am (ET), but can begin as early as 4am. After-hours trading starts at 4pm and can run as late as 8pm.

Start and end times for pre-market and after-hours trading vary from brokerage to brokerage. Schwab even allows you to place trades from 8:05pm (the day prior) to 9:25am (the next day). Making (or losing) money is an all-day affair.

What’s the benefit to this type of trading?

Trading before and after hours allows investors to react to news and events that happen outside the trading day to get ahead of predicted stock gains or losses before the markets open and the masses catch on. If a publicly-traded company releases an earnings announcement after the market closes, after-hours trading allows people to buy shares of the company before its stock price reacts to the news.

In other words, it gives investors a means to capitalize on market opportunities in real time, after hours.

Sounds great, but it’s not all sunshine and rainbows.

Volatile prices driven by a limited pool of traders generally make pre-market and after-hours trading riskier than trading during normal hours. Even when a stock appears to be rising in value during pre-market trading, it could very well take a sharp dive when the bell rings and the trading day begins.

Jump in at your own risk.

So how does this all work?

Since the major US stock exchanges (New York Stock Exchange and NASDAQ) aren’t open and able to facilitate trades until 9:30am, early or after-hours trades are facilitated by electronic communication networks, or ECNs.

ECNs are electronic exchanges that don’t have physical locations, unlike the New York Stock Exchange on Wall Street.

To participate in premarket trading, all you need is a brokerage account in a firm that supports pre-market and after-hours trading, which most do nowadays.

Not all securities are available for pre-market or after-hours trading, but most individual US stocks are. You can’t trade options before or after market hours, either.

Having never invested outside pre-market or after-hours myself, I decided to hop on Fidelity before the trading day to see what pre-market investing looked like.

I took my $0.17 of cash available to trade (maybe you too can experience this type of wealth someday) and put it to work.

To my surprise, the process wasn’t all that different from normal. I put in the ticker for the stock I wanted to look at, Fidelity told me whether or not I could buy or sell it pre-market hours, and that’s about it.

The biggest difference involved with pre-market and after-hours trading is something called a limit order.

A limit order is where you can specify the maximum amount of money you’re willing to pay for a share (with a buy limit) or the minimum amount you’re willing to sell for (sell limit). If the limit you specify isn’t reached, the order isn’t executed.

In pre-market and after-hours trading, you can only trade using limit orders. It’s a way for brokerages to protect traders from incurring significant losses due to the increased volatility.

Market orders, which execute at the best available price, are generally not allowed in pre-market trading.

And that’s about it.

TL;DR - Sleep is for the weak, stock trading is life.

Call to Action

Check out your brokerage’s take on pre-market/after-hours trading if you’re feeling froggy.

More importantly, I have an important construction safety tip I feel compelled to share. If you’re tightening something with a socket wrench, a) don’t pull your socket toward your face, and b) wear eye protection. Your face will thank you. I now look like Shrek.

What We’re Reading/Watching/Listening To:

If you’re into living vicariously through people much, MUCH fitter than you, I highly recommend Netflix’s Tour de France: Unchained. It’s like a blend of Keeping Up With the Kardashians and Remember the Titans, if you ignore most things about both of them.

Debrief on Deck

Next week, Wilson is taking us back to the basics, talking about what you should do when you’re first starting to invest.

I haven’t read it yet, but I’m pretty sure YOLOing into meme stocks during pre-market trading hours didn’t make the list.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on social media (X (formerly Twitter) and Instagram).

Until then, stay the course.

Disclaimer