Trading session, pre-market and after-hours trading: definitions of key stock market terms

Unlike the Forex market, where trading is available at any time of the day, in the stock market there is a certain period of time when investors can sell and buy assets. The trading day of the stock exchange is divided into three periods: trading session, pre-market and after-hours trading. To improve the efficiency of the investment process, it is important for an investor to know about the nuances and opportunities of each of them.

 

The definitions and features of the trading session, pre-market and after-hours trading will be explained in more detail in the article.

 

What is a trading session?

 

A trading session is a time-limited period when the exchange is officially open for securities trading, such as stocks, bonds and derivatives. The opening price of assets is set at the beginning of the trading session and the closing price is set at the end. Regulation and control of trading sessions on stock exchanges may differ depending on the geographical location and jurisdiction of the exchange.

 

The interaction of buyers and sellers during a trading session creates a market and generates asset prices. Let's consider the key features of a trading session.

 

 

1) Regular trading hours. The trading session takes place during the same trading hours set by the exchange. They depend on geographical location and specific market rules.

 

2) Variety of orders. Investors can place different types of orders to buy or sell securities, such as market, limit and stop orders.

 

3) Price setting. During the trading session, the fair market value of assets is determined based on supply and demand dynamics.

 

4) Market opening and closing. Market opening is the time when the exchange officially starts accepting orders. Market closing is the time when the exchange stops accepting new orders. Trading volumes and price volatility may increase at this time.

 

5) High liquidity. Asset liquidity is higher during the trading session than during the extended trading hours of the pre-market and after-hours periods.

 

Understanding the features of a trading session helps an investor to properly build the trading process, analyze market data and select appropriate financial instruments.

 

What are pre-market and after-hours trading?

 

In addition to the main trading session, there are extended trading hours on stock exchanges called pre-market and after-hours. The main purposes of their appearance are to balance the market and avoid high volatility during the opening and closing of the trading session, as well as to provide investors with additional opportunities to earn money on the stock market.

 

 

Definition of pre-market trading

 

The pre-market period is the extended hours of trading assets before the official start of the trading session. The duration of the pre-market trading is set separately by each exchange and can vary from 1.5 to 4 hours. The pre-market is also called the opening auction.

 

Pre-market trading allows one to get income by predicting price changes based on the analysis of news and economic data, which are published before the trading session. For example, an hour before the official trading session, a company publishes a quarterly report that shows revenue growth and increased dividends to investors. A market participant may assume that the company's stock price will rise at the opening bell and place a pending buy order at a more favorable price.

 

Definition of after-hours trading

 

The after-hours period is the extended hours of trading assets after the official end of the trading session. The duration of the after-hours trading may vary from exchange to exchange. The after-hours period is also called the closing auction.

 

After-hours trading is an opportunity to determine the most optimal closing price, as well as to finalize those deals, which for some reason remain open after the end of the trading session (if the investor follows a day trading strategy).

 

Important. During extended trading hours an investor can place only pending orders. Such orders are executed before the start of the trading session only if a matching order is placed at the same price. For example, the first investor places an order to buy 10 lots of stocks, and the second investor places an order to sell only 7 lots of the same stocks. Then the order of the first investor is executed for these 7 lots, and the order for 3 lots will be executed after the start of the trading session (at the pre-market) or canceled (at the after-hours).

 

Advantages and disadvantages of pre-market and after-hours trading

 

Pre-market and after-hours trading is available to both institutional and retail investors. To capitalize on the extended hours trading opportunities, it is important to be informed about the main advantages and disadvantages.

 

Let's consider the main advantages of pre-market and after-hours trading.

 

 

- Trading on news. An investor can place an order based on news and data that is published before the start of the trading session. This will get ahead of investors who only trade during the official trading session.

 

- Closing trades. The investor has the opportunity to sell unwanted stocks at the optimal closing price and not wait for the start of the next trading day.

 

- Determining a profitable price. During extended hours, the investor places orders, setting the most profitable price for himself.

 

Now let's consider the main disadvantages of the pre-market and after-hours trading.

 

 

- Low liquidity. Trading during extended hours is characterized by low liquidity of assets due to less number of active investors and low trading volume.

 

- High volatility. Less number of trading investors can also negatively impact stock market price volatility during extended trading hours.

 

- Limited number of assets. Only a limited list of assets is available for pre-market and after-hours trading, which is set by the exchange or broker.

 

Summary

 

The pre-market and after-hours periods are an important part of trading in the stock market. They provide investors with the opportunity to react to news, events and reports published outside of the main trading sessions.

 

Trading during extended hours has advantages and disadvantages that are important to consider when creating an investment strategy and assessing possible risks. Investors should understand the features of pre-market and after-hours trading, which provide not only additional income opportunities, but also have certain limitations and nuances.

Pre-market and after-hours trading is recommended for investors who already have investment experience in the stock market and have skills in technical and fundamental analysis.