Pre-market trading can be a good way to get in or out of the market, especially for heavily followed stocks and funds. Pre-market trading allows you to place trades before much of the market is ready to act. Despite this advantage, pre-market trading is not without disadvantages.
Here’s what pre-market trading is, how to do it and what to look out for.
What is pre-market trading?
Pre-market trading is another way you can trade stocks or ETFs, in addition to regular daily hours and after-hours sessions. Securities on the New York Stock Exchange and Nasdaq are available for pre-market trading, but only the largest, most liquid stocks and funds typically trade during this period.
Trading in stocks and funds in the US generally takes place between 9:30 AM and 4:00 PM Eastern Time. Anything outside of these times is considered extended hours, including pre-market trading, which runs from 4:00 a.m. to 9:30 a.m. Eastern Time.
The after-hours session runs from 4:00 PM to 8:00 PM Eastern Time.
Trading before the market open used to be the domain of wealthier clients, but now many online brokers, including Charles Schwab and Fidelity Investments, allow any client to trade during that period. However, many brokers do not allow clients to trade for the entire trading period before the market, often limiting them to about two and a half hours before the regular session.
So it’s not unusual for online brokers to allow pre-market trading to actually start at 7 a.m.
How to execute trades during pre-market hours
Executing a pre-market trade is as easy as doing a trade during regular hours, although it does come with risks. Here’s how to set up your pre-market transaction for buying and selling stocks and funds:
1. Decide what you want to trade
As with a trade during regular hours, you will need to enter the stock or fund sticker symbol, the number of shares you want to trade and the type of order you want to place, for example a limit order or market order.
2. Set any transaction terms and time period
If your broker lets you set the time period, you can specify when you want to execute the order, with the following choices:
- During regular hours. This setting means that the order will only be executed during the regular session, when the market is generally the most liquid.
- Regular and extended opening hours. With this setting, your broker will execute the order during the regular session or the pre-market or after-hours sessions, if possible.
- Only during extended hours. Your broker may allow you to set the trade to execute only during the pre-market or after-hours sessions, or just one of the sessions.
The market is much less liquid during the pre- or post-market trading sessions, so it makes a lot of sense to use limit orders. You must specify a price that you are willing to accept, but that will help you avoid executing the trade at a price that is significantly different from the security’s recent trading price. Some brokers only allow the use of limit orders during the extended sessions.
3. Place the transaction
Once you’ve set the terms for your trade, you’re ready to submit the trade to your broker.
But don’t be alarmed if the transaction doesn’t execute immediately, or even if it never happens. Relatively few investors participate in pre- or post-market trading, and during these periods there are no market makers to guarantee liquidity. To execute your order, you must find someone willing to execute the trade at your price. The market may simply not be available – at any price.
Risks of Pre-Market Trading
Pre-market trading comes with some risks for investors who want to take advantage of it:
- Lack of liquidity. The pre-market session is much less liquid than the regular session for most securities much of the time. You may not be able to trade at a price you are willing to accept. And market makers and other liquidity providers will not ensure an orderly market as they would in normal trading. Only relatively few shares may be traded, even for the large and generally liquid stocks.
- Inability to execute a transaction. You can place an order, but that does not mean it will be filled. And if no one wants to trade at your price, you’re out of luck. If you insist on trading at any price, you may end up with a much different execution price than you otherwise intended.
- Potential to misjudge sentiment. You may want to get out or into a position after a major news event, such as a company’s earnings, before the rest of the market reacts. But the lack of liquidity in the pre-market can lead you to think a stock will sell off during the regular session when it is actually about to rise. Or vice versa. You may end up buying based on what looks like a good earnings report, but then the market crashes. Be careful.
Those are the biggest concerns in pre-market trading, and they all essentially have to do with the lack of liquidity that characterizes most pre-market securities.
In short
Pre-market trading allows you to place trades outside of normal market hours, but this ability doesn’t mean you have to. With a thin and illiquid market it can be easy to trade at a bad price, while you can wait a little longer and get a better price in the more robust regular market.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
