Lesson Pre and post market trading

Risks associated with extended hours trading

Learn about the inherent risks involved in pre-market and after-hours trading

While extended trading hours may provide additional opportunities, it is important to understand the risks as well.

Liquidity: The liquidity of a security refers to the number of orders in the market, and represents how easily you can convert a security to cash without substantially affecting its market price. Since there are fewer traders participating in pre-market and after-hours trading, liquidity tends to be low, meaning it’s more likely that an order may only be partially executed or not executed at all.

Volatility: Another result of lower liquidity, extended-hours trading tends to see more volatility, which means a more unstable security price that swings between highs and lows more frequently.

Spreads: With lower liquidity and higher volatility, the difference between the available buy and sell prices (known as the spread) may be greater during pre-market and post-market hours.

Availability: Not all stocks are available for pre-market and after-hours trading, and only limit orders can be placed in extended-hours trading.

Competition: Many extended hours traders are professionals with large institutions, and may have access to more current information than individual investors.

Market-hours traders: Certain institutional and major investors may choose to simply refrain from pre-market and after-market trading, regardless of company announcements or market events. Due to this, it's possible for a stock's price to fall sharply during extended hours trading only to rise when the markets open the following day.

Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.

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