Glossary

The Forward P/E Ratio is simply a stock’s share price divided by future analyst projections of the company’s earnings. While analyst projections can be fairly accurate, they are also subject to bias and could vary greatly from actuality.

Stocks react to positive news by trading at higher prices as trader confidence in the stock rises. A “gap” occurs when a stock opens at a price significantly higher than the previous day’s close. The “go” occurs when the stock rallies with an upward trend throughout the day.

In psychology, “herd mentality” refers to the individual’s proclivity to follow the group rather than their intuition. The same principle can be applied to the stock market. An investor may emulate the trades of others rather than using their judgment. The same can be true concerning stock analysts: an analyst may be more likely to agree with others than disagree. This phenomenon can result in market bubbles when optimism is high, or market panics when optimism is low.

What are pre-market and after-hours trading and why are they essential in understanding the markets? The New York Stock Exchange (NYSE) and NASDAQ’s weekday trading window is from 9:30 a.m. to 4:00 p.m. Eastern Time (ET). However, there is much market activity that takes place outside of this window. Pre-market trading, which lends its name to PreMarket Prep, occurs before the market opens, while after-hours trading occurs after the market closes.

The Market Open and Close

Pre-market trading occurs daily from 4:00 a.m. to 9:30 a.m. when the regular session starts. Movement in the pre-market provides a very useful way to gauge the flow and direction of the market once it opens. On PreMarket Prep (and elsewhere), particular attention is paid to the S&P 500 index to track the sentiments of the markets. After-hours trading is another popular option for investors to capitalize on the trading hours outside of when the NYSE & NASDAQ trading sessions close at 4:00 p.m.

Factors Impacting the Markets

Although important events and developments affecting the market often take place within the NYSE trading session, many may occur earlier in the morning or later at night. For example, when companies post earnings quarterly or annually, they are often released outside of market hours. Earnings reports greatly impact share price, as they are critical to understanding the success of business operations; how companies perform compared to expectations is reflected in pre-market and after-hours trading activity directly after they are released.

Often, major news developments have the capacity to move the markets outside of market hours. Geopolitical events, mergers and acquisitions, and international news will often be reflected in trading outside market hours. On the first Friday of every month at 8:30 a.m., the United States Bureau of Labor Statistics releases key economic indicators such as GDP and unemployment. Given that these indicators show the overall state of the markets and the U.S. economy, pre-market activity offers a way to see how traders are reacting to the information.

Disadvantages of Pre-Market and After-Hours Trading

Although there are many advantages of pre-market and after-hours trading, it is also important to understand the risks of such trading. Given that there is less liquidity in pre-market and after-hours transactions, there is greater volatility and fluctuation in the price of shares. However, pre-market and after-hours still attract many investors and significant activity. Although there is increased volatility, there are many risk-management considerations investors can utilize to reduce over-exposure.

The Bottom Line

Even as the opening and closing bells signal the bookends of the trading day, pre-market and after-hours trading are also important tools for investors as they track and trade the market each day. These extended trading hours provide valuable insights into market sentiment, allow investors to react to news and earnings releases, and offer additional opportunities to manage their investment strategies effectively.

The P/E Ratio is simply a stock’s share price divided by the company’s earnings. A high P/E ratio indicates that a company could be overvalued by investors, while a low P/E ratio indicates that a company could be undervalued by investors.

Stock analysts evaluate companies and offer their opinions about future trajectories of a given stock price. They consider historical performance, industry growth, management guidance, and other factors to make projections and ratings. Analysts may issue ratings of “Buy,” “Sell,” or “Hold,” for example. Analyst upgrades or downgrades, such as a change from “Hold” to “Buy,” have the potential to move stocks in either direction. It is also important to understand that some analysts carry more respect and weight than others.

A sudden downturn in price after entering a position may discourage many investors. However, it can be beneficial to double down by increasing your position, thereby “averaging down.” An example: a trader buys stock in a company at $100 a share. The share price declines to $80 a share. If the trader is still bullish on the stock, they can double their position while decreasing their average purchase price to $90 a share.

Asset managers often increase holdings in successful stocks right before the end of the fiscal quarter to make it appear as though their positions did better than in actuality. Holding shares of a company near the end of the quarter gives the appearance that the asset manager reaped the gains of an appreciating share price throughout the entire quarter rather than just a few days. This also applies to decreasing holdings in unsuccessful stocks as well.

Often, traders may have uncertainty or pessimism regarding a particular trade or investment position. If you are “in doubt,” it is sometimes best to “get out” of your investment. By selling off or reducing your position, you are limiting your risk and sidestepping potential losses.