Updated and Reviewed by Gabe Ross on December 17, 2023
Market Sessions Explained
The U.S. stock market operates from Monday through Friday, except on holidays. The market has three trading sessions: Pre-market, Regular, and After-hours. The Regular session offers the longest trading hours. This session also draws the most participants, resulting in the most active trading period.
When you hear about the opening bell and the closing bell, they typically refer to the start and stop of the regular market session.
Let’s explore the three market sessions in more detail.
1. Pre-Market Trading
The pre-market session begins at 4:00 a.m. and runs until 9:30 a.m. EST. This session gives investors early access to the market before the official trading time begins.
Understanding how the pre-market trading session works requires an understanding of the terms “bid price,” “ask price,” and “bid-ask spread.”
The bid price represents the maximum amount the potential buyer is willing to spend on the security. On the other hand, the lowest price of the stock at which the potential seller is ready to sell the securities they own is known as the ask price. The market determines the bid and ask prices. A trade can happen when there is a counterparty: a buyer can buy only when there is a seller, and a seller can sell only when there is a buyer.
The bid-ask spread is described as the difference between the highest possible price a buyer is willing to pay and the lowest price a seller is willing to accept for a stock. The amount of trading activity in the security as a whole influences the spread between bid and ask prices; higher trading activity leads to narrower bid-ask spreads, and the opposite is also true. The pre-market session draws only a fraction of normal market participants. As a result, the session typically suffers low liquidity and orders take longer to fill.
The limited market participation can also lead to market inefficiencies. As a result, the bid-ask spread can be wider in the pre-market trading.
Let’s look at a practical bid-ask spread example to grasp how it functions:
Simon chooses to use his funds to purchase a few stocks. He’s thinking about investing in ABC Co. ABC’s current ‘bid price’ in the market is $50, while the ‘ask price’ is $52.
He determines the spread of the ABC Co. stock using the spread formula. His calculation is as follows:
Spread = Ask price of a stock – Bid price of the same stock
= $52 – $50
= $2.
The spread of a stock of ABC Co. here is $2. The closer to zero the bid-ask price, the greater liquidity of the security.
Why Trade in the Pre-Market Session?
Pre-market trading has several benefits, including convenience, the capacity to react to more recent developments, a speedier discovery of the opening price, and competitive advantages.
Many companies release their earnings results before the opening bell. As a result, the pre-market session can allow you to be among the first to react to these earning reports.
This session also gives you an early opportunity to react to overnight events that can affect the market.
The pre-market period only attracts a small portion of the regular market participants, however, which reduces competition and decreases the likelihood of trades.
Risks of Pre-Market Trading
Pre-market trading comes with risks such as a greater buy-ask gap, a lack of liquidity, considerable price volatility, and the requirement of professional expertise. Limited participation makes the market less efficient, which causes low liquidity and sluggish order fulfilment. If you place a buy order during this time, you will wait to be matched with a seller willing to accept your price. Orders may thus take longer to execute than normal.
Due to limited market participation, the bid-ask spread can be wider, which means it is difficult to buy or sell at your desired price. As a result, you may end up buying or selling shares at prices that diverge from the stock’s recent price during the pre-market session. For S&P 500 companies, the typical spread is between 13% to 18%.
In general, the pre-market session is only open to trading listed equities. This is because stocks with insufficient volumes, such as those with a tiny float, are not widely owned and therefore do not make for good candidates for pre-market trading.
2. Regular Trading Session
The regular session starts at 9:30 a.m. and lasts until 4:00 p.m. EST.
The opening hours are considered a volatile period. It is the time when most investors rush to react to events that occurred since the previous trading session closed.
As a result of the high volatility, the first hour after the opening bell tends to draw many day traders. This is the time when there is a rush to process orders that came through after the previous closing bell.
While there is a chance to make a quick profit in a volatile market, high-frequency trading is better left to skilled traders. As a result, beginner investors would do better to avoid the opening hour of the regular session.
After heavy trading in the opening hours, market activity tends to slow down around noon.
As a result, it may be safer for beginner investors to enter the market around midday. That is the time when the market is most stable, as the frequency of trading tends to slow down. Moreover, most investors have had time to react to the day’s news events by this time.
Additionally, investors have access to stock options as long as they only trade during regular stock trading hours.
Call and put contracts are the two main types of options. The buyer of a call option receives the right to acquire the underlying asset at a later date in return for a fixed sum, termed as the exercise price or strike price. A put option gives the buyer the authority to sell the underlying asset at a future date and price.
Investors can use limit orders to specify criteria for the purchasing and selling of securities. The investor must specify a quantity and the intended price for the transaction when placing a limit order. For example, let’s assume an investor wishes to purchase a stock for $9 per share, but it is currently trading at $10 per share. If a limit order is placed for ten shares at $9 each, the order will be executed once the share price hits $9. Limit orders can be filed for execution throughout pre-market, regular, and after-hours trading periods, in contrast to market orders, which can only be carried out during the regular market session.
The last hour of the regular session also tends to be volatile. That is the time when day-traders try to close their positions. It is also the time when many investors may try to respond to developments such as court rulings, regulatory actions, and more.
3. After-Hours Trading
The after-hours trading kicks off at 4:00 p.m. and runs until 8:00 p.m. EST. As with the pre-market session, the after-hours session typically has fewer market participants. Moreover, transactions are handled through alternative electronic channels, since market makers are absent during this time.
As a result, the after-hours session is characterized by slow orders and wide bid-ask spreads.
Why Trade in After-Hours Market?
After-hours trading can help accelerate the T+2 trade settlement timeline. Every deal in the capital market has a life cycle. This begins when a purchase or sell order is placed for execution and concludes when the deal is concluded. This process is known as the trade life cycle. T+2 settlement cycle denotes a trade life cycle that takes two days to complete, from commencement to settlement. For example, if you make a trade after the closing bell on Monday, the trade would settle on Wednesday. However, your trade would be delayed by a day if you waited until the following day to make the transaction.
If you are busy during the day, the after-hours session may be your chance to participate in the market.
After-hours trading also gives you a chance to react sooner to market-moving events that occur after the closing bell. For example, many companies release their earning results or make major announcements after the markets close.
If a company reports great results, you can buy its shares before the rest of the market gets the chance to do so. Similarly, if a company releases poor earnings results, you can try to sell your shares in the after-hours before other sellers flood the market.
Some brokers may restrict the hours in which you can access the extended-hours market, however.
What Time of Day Should You Buy Stocks?
The best time to buy shares is during the regular session. That is when the market is most active and efficient. However, you would want to avoid the first and last hours of the regular session as they tend to be more volatile.
On the other hand, extended-hours trading appeal to frequent traders, like pattern day traders. Making four day trades in a span of five working days is known as pattern day trading. For instance, if a shareholder acquired ten shares of ABC in the morning and sold them in the afternoon, it would be considered a day transaction. If they complete a total of four or more day transactions over the course of five working days, they will be classified as a pattern day trader.
Conclusion: When Is the Best Time Of Day to Buy Stock?
The best time to buy shares for beginner investors is around noon. The market tends to be stable and more predictable at this time for inexperienced investors to navigate.
If you are investing for the long-term, the time of day when you decide to buy or sell stocks is less significant. Instead, you should focus on pursuing your financial goals and investing in line with your risk profile.
For long-term investors, finding high-quality stocks is far and away the most important consideration. TipRanks offers powerful stock research tools that can help you find the best stocks to acquire at any time of day.
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