Premarket Stock Trading — When and How Does It Work?
While there are set hours within which the stock market operates, the business of trading is one that never sleeps. Market moves can in fact be made outside of the regular hours, giving investors the chance to trade before the opening bell rings out.
Traders do not need to worry about being limited to trading during the fixed session times, as there are plenty of opportunities to buy and sell stocks prior to when the major exchanges open for regular trading.
In this article, we will be looking closer at what premarket trading is, when it takes place, and some of the advantages and disadvantages of trading before the markets officially open for business.
What is Premarket Trading?
When it comes to offering a definition of premarket trading, its wording is rather self-explanatory, it is essentially the period of trading activity that occurs before the regular trading session of a stock exchange.
In the US, premarket trading usually takes place between the hours of 08:00 and 09:30 EST, although in some cases trading activity can get underway as early as 04:00 with some traders getting in on the action in the small hours of the morning via electronic exchanges.
It is a relatively new concept, with the New York Stock Exchange (NYSE) first allowing trading after regular market hours in response to around-the-clock global trading.
In the three decades since, trading business that is conducted beyond market hours has grown in popularity, due in large part to the significant increase in the prevalence of computerised international trading, which has become increasingly common.
As well as playing host to trading activity before the day’s session, investors can also enter trade after the regular markets have officially closed, with after-hours trading generally occurring between the hours of 16:00 and 18:30 EST.
Premarket Trading – Key Points
Before attempting to start premarket trading, it is important to be aware of some of the finer points involved, specifically relating to the rules traders need to watch out for, as well as understanding the exact nature of out-of-hours market trading.
Rules
Traders should take note of the actual premarket trading and after-market trading hours, so that trades are actually being made out-of-hours and not within the normal trading session, therefore, defeating the whole object of deliberately trading in this way.
Orders
The types of trades that investors can make vary from those made during normal trading hours, with some brokerages only accepting limit orders so as to protect investors from unexpected or adverse extended-hours prices.
Fees
While many brokers charge their regular commissions for trading in premarket sessions, traders should take note that some choose to charge an extra fee per share for premarket trades, so it is worth checking the full list of fees on a broker’s website.
Nature
Keep in mind that premarket trends and price ranges can suddenly change or take a different course after the opening bell, so it is important to be vigilant in order to prevent getting caught in a position that may backfire after the open.
Advantages
Reaction
Premarket trading can give investors a chance to react to overnight news before the markets reopen for the regular session. This means there is an opportunity to act on major company announcements, geopolitical developments, and overseas events ahead of those trading after the opening bell.
Convenience
Having the ability to start trading earlier in the day would be suited to the busy schedules of traders who may be operating within multiple time zones or for those part-time investors who already have busy schedules during regular hours.
Competition
Traders are always looking out for a way to get ahead of the competition, and with premarket trading they might have the chance to. Investors that are familiar with trading patterns could capitalise on favourable premarket prices, when compared to certain regular session prices.
Disadvantages
Liquidity
Trading volumes in the premarket period are far lower than during regular hours, with fewer buyers and sellers of stocks. As a result, there is limited liquidity, increased volatility, and wide bid-ask spreads at this time of day.
Uncertainty
Stock prices can differ significantly in the premarket, as they only reflect prices from a handful of electronic communication networks (ECNs). In comparison, regular hours rates are based on multiple exchanges and ECNs, resulting in better consolidated stock quotes and price discovery.
Execution
Limit orders are restrictive in that they can only be executed at the limit price or better, which means that if the market shifts away from the limit price, the order will not be executed at all, which is an obvious issue for any market trader.
Conclusion
Premarket trading hours can prevent a good opportunity for experienced and sophisticated investors who know what they are doing, and can best maximise the advantages of operating out-of-hours and early in the morning.
Beginner or less advanced traders should be aware that trading the premarket is a much riskier activity than trading during regular hours. Due to this, it is far more common to see investors watching premarket trading action, rather than actively participating in it.