Stock markets and exchanges usually have hours within which they operate, in the case of U.S. securities markets like the New York Stock Exchange (NYSE), they are open for regular trading every Monday through Friday from 9:30 AM to 4:00 PM Eastern Time (EST).
However, there is something called pre-market trading, which as the name implies, allows investors to trade stocks before the official market session commences. Pre-market trading takes place between 8 AM and 9:30 AM EST from Monday to Friday and allows investors to react to off-hour news and events and dictate the strength and direction of the market for the rest of the day.
Generally, the trading activity in the pre-market tends to have limited volume and liquidity, and therefore, it is common to find large bid-ask spreads. Some retail brokers do offer pre-market trading but with a limited facility on the type of orders that can be made during the session. Meanwhile, direct-access brokers allow pre-market trades to commence as early as 4 a.m. EST on weekdays.
What is Pre-Market Trading?
In pre-market trading, traders can buy and sell securities on electronic market systems like the alternate trading system (ATS) or electronic communication network (ECN), which allow buyers and sellers to connect over a digital network without having to wait for regular trading to begin.
Despite this, there will be less liquidity on offer because of very little trading activity taking place for most stocks so early in the morning, unless there is an important news announcement. Systems like ECNs even allow pre-market trading at different hours, this is to accommodate investors in international markets that operate from multiple time zones.
In 1991, the NYSE introduced after-hours trading by extending the trading session by an extra hour. This was in direct response to the London and Tokyo exchanges offering more trading hours, by offering investors the facility to trade securities even after regular market hours. ‘
After computerized trading became a common practice, thanks to the onset of the Internet, many exchanges have extended their trading hours. Today you can conduct pre-market trading in U.S. markets from 4 AM until the opening bell for the regular market goes off at 9:30 AM EST. Meanwhile, after-hours trading occurs from 4 PM to 6:30 PM EST on U.S. securities exchanges but can continue until the next morning on international exchanges.
Further info : What Is Stock Trading? And Types Of Stock Trading
How Does Pre-Market Trading Work?
Pre-market trading can be taken advantage of by just about any market participant. Institutional investors and high-net-worth individuals are the most common benefactors of trading before the market opens because it helps them make an idea of which direction the market and certain securities might be headed on that day.
Since overseas events, geopolitical issues, economic instability, and other factors can affect financial markets, traders tend to use pre-market trading to get ahead of the curve by reacting better to breaking news.
For instance, a company has released its earnings call after the market closed. However, the report shows that the firm’s performance in the quarter differed from expectations, which could lead to its stocks rising or falling once the market reopens the next day. A pre-market trader could use the extended hours to their advantage by buying or selling the shares before the retail market could react to the news.
What are the Benefits of Pre-Market Trading?
There are several benefits to pre-market and after-hours trading, such as:
What are the Risks Associated with Pre-Market Trading?
Now let us look at the risks of pre-market trading, which include:
What Type of Securities Can Be Traded in the Pre-Market Session?
Only listed stocks can be traded in a pre-market session, specifically those that have a higher float and are widely held, like stocks with a large market cap and sufficient trading volumes. Options cannot be traded in the extended-hours market.
Pre-market trading offers an opportunity for both experienced and newcomer traders to react better to news and events related to the financial markets even when the exchanges are not operational. It is also a convenient way to trade for those who cannot buy and sell securities during a regular open market session.
However, It is a significantly risky trading practice, therefore, it is common for investors to watch premarket trading actions rather than participate in them to dictate how the regular market would perform that day.
Extended-hours trading puts individual investors up against professional traders with a lot more experience, and can really be an eye-opening experience that will be a tad too bit of a financial risk.