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What Is Premarket Trading, and How Does It Work?

Although the stock market technically has hours that it operates within, you can still trade before it’s open. This is called premarket trading, and it allows investors to buy and sell stocks before official market hours. A major benefit of this type of trading is it lets investors react to off-hour news and events. However, a limited number of buyers and volatile prices can make premarket trading a bit risky for novice investors. For help with premarket trading and any other investment advice, consider working with a financial advisor.

What Is Premarket Trading?

U.S. securities markets like the New York Stock Exchange (NYSE) are open for regular trading from 9:30 a.m. to 4 p.m. Eastern Standard Time (EST). However, traders can also buy and sell securities on electronic exchanges before the regular trading day begins. These electronic exchanges (also called electronic communication networks, or ECNs) don’t have physical locations. In other words, buyers and sellers connect over a digital network.

NYSE Arca is one such ECN. It was created when the NYSE merged with one of the early ECNs. Another ECN, Instinet, traces its beginning to the late 1960s. ECNs permit premarket trading during different hours. Some electronic exchanges accommodate trading as early as 4 a.m. EST. However, most premarket trading in the U.S. takes place from 8 a.m. to 9:30 a.m. EST.

Premarket trading is a fairly new development. In 1991, the NYSE responded to around-the-clock global trading by allowing trading after regular market hours.

Since then, computerized international trading has become increasingly common and the exchanges have extended trading beyond market hours. Today, extended-hours trading in U.S. markets can take place any time between 4 a.m. EST and the opening bell for regular market hours at 9:30 a.m. EST.

Trading can also take place after regular markets close. After-hours trading generally occurs from 4 p.m. to 6:30 p.m. EST. However, after-hours trading may continue until the next morning on international exchanges.

How Premarket Trading Works

If you’re wondering who can take advantage of premarket trading, it’s really just about anyone. While institutional and high-net-worth individual investors most commonly trade before the market opens, technically anyone can do it.

Some investors monitor premarket trading to see where the market and individual securities are headed when regular trading starts. Changes in prices and trading volumes can foreshadow the rest of the day’s market events.

Traders also use premarket trading to try to get ahead of market reactions to breaking news. Overseas events, political instability, and other factors can affect markets or individual securities.

For instance, a corporation may release an earnings announcement after the market closes. If the earnings news is considerably different from expectations, this could cause the stock to rise or fall the next trading day. A premarket trader might attempt to buy or sell early before the retail market can react to the news.

Other events that might trigger premarket interest could include a court ruling in a lawsuit or a change in regulations. If an influential analyst downgrades or upgrades a stock, that also can encourage premarket traders.

Risks Associated With Premarket Trading

What Is Premarket Trading, and How Does It Work?

There isn’t much benefit to trading before 8 a.m. EST, but even trading at that hour can be risky. Trading may increase during that time, but news and even rumor can broaden the gap between bid and ask prices for stocks.

As an example, stocks like GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC) were widely covered in the news at the beginning of January 2021 after individual investors organized by popular Reddit message boards drove up prices.

This forced traders who had shorted the stock, or betted that the price of those stocks would fall, to buy it so that they could avoid taking considerable losses on their short positions. As a result, a short squeeze was created, adding to the frenzy to buy more stock and driving up prices even further.

Now, investors are seeing these prices drop as squeeze trades lose momentum. Experts caution investors to be careful when trading stock during short squeezes, and that volatile prices can be risky for beginners.

You should keep in mind that prices can be far more volatile than usual in premarket trading. Limited volume can make them rise and fall more rapidly and steeply than usual. And traders used to more moderate trading could take significant losses from rapid premarket price changes.

Even worse, prices of stocks traded during premarket hours may not reflect those shares’ prices during regular hours. Premarket trends can be deceptive. Even when stock prices appear to be rising during before-hours trading, they may drop sharply at the opening bell.

Since fewer trades occur in premarket trading, it could be tough to find a buyer or seller. This makes executing trades and determining prices difficult.

Any premarket pricing trends should be taken lightly. Typically, only the most experienced traders should attempt trading before standard market hours.

Differences Between Premarket Trading and Regular Trading

Competition is more intense in the premarket hours because relatively few individual investors trade then. That can put individual investors at a significant disadvantage with professional traders, who have access to more information.

You may not be able to complete a trade with another investor if you are on different, incompatible ECNs. Meanwhile, a computer delay at your brokerage can slow a trade or block it altogether.

Generally speaking, premarket trading operates under different rules than regular trading. Different ECNs and brokerages often have different rules for premarket trading, so you may want to compare and contrast them.

Limit orders are common among brokerage firms that accommodate premarket trading. With a limit order in place, trades are executed only when the stock reaches the limit price or higher.

Time limits are also common in the pre-market. Time limited orders may be cancelled if not executed during premarket trading. Orders entered during premarket trading may be executed when regular trading hours begins. Also, orders entered during the regular trading day may be executed during after-hours or premarket trading.

Bottom Line

What Is Premarket Trading, and How Does It Work?

Premarket trading can represent an opportunity for experienced and sophisticated investors. It’s also much riskier than trading during regular hours. For this reason, it’s more common for investors to watch premarket trading action than for them to participate in it.

Trading before the market opens will likely place individual investors in direct competition with professional investors with a lot more experience. If you still feel drawn to those early trading sessions, it may help to have a professional on your side.

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Photo credit: ©iStock.com/ipopba, ©iStock.com/scyther5, ©iStock.com/katleho Seisa

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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