Beginner’s Guide to Pre-Market Trading

Wed Feb 3, 2021, 11:32 am | by Dan Schmidt | No comments

The ringing of the bell on Wall Street is a time-honored tradition signifying the beginning and ending of the daily trading session. Now more than 100 years, the bell ringing has become a bit of a pageant. Instead of a work whistle, it’s now the finance equivalent of hosting Saturday Night Live, with executives and celebrities sounding the bell in front of dozens of reporters and cameras.

Not only has the bell ringing become a bit overdone, but it also no longer truly signifies the beginning or end of trading. Yes, the floor of the New York Stock Exchange may run on a normal business work schedule, but trading is no longer constricted to the hours of 9:30 am to 4:00 pm ET. Pre- and post-market trading hours allow investors to buy and sell stocks long before and after the bell rings at the NYSE. Buying and selling before and after normal market hours can present unique opportunities, but this type of trading also presents different risks that must be understood before you enter a trade.

How Does Pre-Market Trading Work?

Unlike normal trading, pre- and post-market trading extend well into the early morning and evening. Pre-market trading begins at 4 am ET and extends all the way until the market officially opens at 9:30. After-hours trading goes from 4:00 pm to 8:00 pm ET. 

If you want access to pre- and post-market trading, you’ll need permission and access from your broker. Extended hours trading used to be a refuge of the institutions and hedge funds, but technology has enabled retail and non-sophisticated investors to gain access as well. Since trading during these hours is limited, liquidity is reduced and the bid/ask spreads become more pricey. But traders in these time periods can react to earnings reports, economic data, and other catalysts sooner than most. Additionally, volatility can increase drastically in pre- and post-market trading, especially in low float and low volume stocks.

Different brokers will have different rules on pre-market trading. Some will only allow certain securities to be bought and sold and limitations may be placed on advanced types of trading. The earliest you can begin trading is 4:00 am ET, but you’ll need to contact your broker to confirm trading hours and individual rules.

Pre-Market Trading and Stock Prices

Prices during pre-market trading can be more volatile than usual since there are fewer market participants, but most tend to be major players. When volume is low but the money behind trades is still large, stock prices can make huge moves despite the light action. 

Stock prices in the pre-market sessions are also more prone to movement because catalysts like earnings reports and economic data are released before normal market hours. If a company reports a blowout quarter and raises guidance before the market opens, the stock will rocket upward without needing much volume.

Pre-Market Trading Risks

Pre-market trading may seem like a path to increased profits that shuts out a majority of traders. And while pre-market trading does allow investors to move on information quickly, there are some downsides to trading outside normal market hours. Here’s what new extended hours traders should be wary of:

  • Increased Spreads – When volume is low, brokers have to work harder to get trades executed and spreads will increase as a result. Commissions will still be free for pre-market trades, but the difference between the bid and ask price will be much greater.
  • Less Efficient Trade Execution – Another consequence of lower liquidity is the effect on trade execution. With fewer and fewer shares trading hands, it’s much more difficult to get trades filled. If you want to take advantage of a thinly-traded small cap in the early AM hours, you might get frustrated watching the share price increase while your order remains unfilled.
  • Increased Volatility – Big gains might be the reason you seek pre-market trading, but know that volatility can also work against you. Perhaps you enter a trade at 7:00 am anticipating a big earnings beat, but the company misses and your trade becomes an instant loser. Not only do you lose capital more rapidly, but you might have trouble exiting your position.

The Rules of Pre-Market Trading

Pre- and post-market trading has certain rules beyond just the different hours of operation. You’ll be limited to certain order types and you won’t get the reliability you’ve grown accustomed to with normal hours trading. Additionally, you’ll only be buying and selling stocks or futures here – options trading is almost exclusively done between 9:00 am and 4:00 pm. Be sure to double-check with your broker on their specific rules before attempting any pre-market trades.

  • Limit Orders Only – You can’t enter a market order, only limit orders will be accepted during pre-market trading. A limit order requires you to enter a specific execution price for your trade, which allows for more precise execution. Market orders during pre-market hours would be at risk of significant slippage. 
  • No Guarantees – If you enter a trade during normal trading hours, you can be confident it will be executed swiftly and close to your desired price, even if it’s a market order. Unfortunately, trade execution is not guaranteed during pre-market trading. Brokers may be unable to fill your trade if the volume is low and your trade idea will be blown up before it even gets started.
  • Different Rules for Different Brokers – What hours does your broker allow trading? How many securities are available? Unfortunately, there’s no set standard for pre-market trading and each broker operates differently. You’ll have to research and find a broker whose premarket parameters fit your goals.

Benefits of Trading Premarket

The risks of pre-market trading are real, but so are the benefits. Pre-market traders get a ‘sneak peek’ on a number of different reports and catalysts. Here are a few things to keep your eye on while downing your first morning coffee.

  • Economic Data – Employment, consumer spending, and other types of economic data are all released early in the morning. By accessing pre-market trading, investors can react instantly to these reports and place trades in anticipation of larger moves when the market opens.
  • Earnings Reports – Many companies release their earnings data before the morning bell, but pre-market traders can listen in on these calls and react instantly to changes in guidance.
  • Unexpected News – If a major financial or economic news story breaks overnight or during the weekend, pre-market traders will get the first crack at positioning themselves. Being able to react first to big news is a significant advantage for extended hours traders.

Final Thoughts

Pre-market trading takes place between 4:00 am and 9:30 am ET and it’s no longer strictly the hedge funds’ playground. Retail traders can access pre-market trading through their online brokers and execute early trades right alongside the market pros. Pre-market trading can lead to outsized profits since you get first-mover advantage to earnings, economic data, and other news reports, but you also need to understand the downsides.

Pre-market trading is risky. If you trade a low float security with little volume, you could find yourself unable to exit a bad trade. You could also see volatility increase in the blink of an eye and your 5% gain is suddenly a 10% loss. And perhaps that 10% loss continues to compound since the shares are thinly-traded and no one is interested in taking the other side. The pros and cons are magnified in pre-market trading. You’ll need to adjust your style and goals accordingly if you want to be successful in the early hours.