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What Are Pre-Market Stocks?

Amateur stock traders know they can trade during specific hours and on specific days to build their portfolios and grow their investments. But experienced traders know you can make money outside the traditional exchange hours of 9:30 a.m. to 4 p.m. with pre-market trading. Unlike traditional on-hours trading, after-hours trading has a bunch more rules, regulations, and risks to know about. Learn how pre-market stock trading works, read up on its advantages and disadvantages, and decide whether or not it’s for you.

What Is Pre-Market?

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Pre-market is the time before the market opens officially in the morning. Regular market trading hours are 9:30 a.m. to 4 p.m. EST, Monday through Friday, excluding federal holidays. Pre-market trading can start as early as 4 a.m. to compete with the Asian markets and goes until the starting bell of the regular exchange at 9:30 a.m. Despite the early access, most pre-market trading happens starting at 8 a.m. because that’s when most important early morning news or announcements drop.

Understanding Pre-Market

Pre-market trading is usually pretty quiet unless a company or industry has dropped some major news, like a leadership shakeup or a monumental industry report. Only some retail brokers participate in pre-market trading, so there’s limited volume and limited liquidity in the pre-market, which often leads to large bid-ask spreads and the possibility of riskier trades. You can’t place any type of order you want during pre-market — limit orders are usually the only allowable kind. There’s a specific set of rules that govern how stocks change hands during this early hours exchange period.

Pre-Market Trading

The pre-market can give some false impressions if you don’t have solid information about the stocks you’re looking to buy or sell. Stocks sometimes appear like a sound bet, only to reverse in value once the market officially opens. For this reason, pre-market trading is often best left up to experienced traders rather than newbies.

If you’re wanting to trade on the pre-market, you have to have special access through your brokerage account. You’ll have to place limit orders through an Electronic Communications Network, or ECN, like Bloomberg Trade Book, Instinet, Island, or Archipelago.

Considerations for Pre-Market Trading

When deciding whether or not a pre-market trade is a viable choice, there are a few considerations to keep in mind. First, check the news. If a company of interest releases a big announcement about a new product or change in leadership, you might be able to make a solid investment move in the pre-market.

Second, have a look at the economic indicators. Many of these signals, like the Bureau of Labor Statistics monthly jobs report, drops around 8:30 a.m., an hour before the market officially opens. You can use that information to inform any pre-market trades. Other indicators, like the Dow Jones Industrial Average, or DJIA, update daily, and can also help guide your pre-market decisions.

Advantages of Pre-Market Trading

The chief advantage of pre-market trading is the possibility of getting ahead of other investors when major industry news and company announcements drop. Armed with market-changing, substantiated facts, you can confidently make trades before most other brokers and reap substantial rewards.

Disadvantages of Pre-Market Trading

While you can make some significant gains in the pre-market, you do need to know about the disadvantages of pre-market trading before you get started. The Securities and Exchange Commission lists the following as the risks of pre-market and after-hours trading:

Limited quotes

Depending on the firm you use for your trading, you might only be able to see quotes from the trading system they rely on for after-hours trading rather than multiple quotes from the entire field. This can vastly limit your understanding of pricing, volume, and demand. Before you start pre-market trading, find out what quote access you’ll have through your brokerage account.

Lack of liquidity

With less volume comes less liquidity. You might not be able to execute the trades you want to make simply because there are no interested traders available in the pre-market, leaving you stuck.

Large quote spreads

That same lack of volume can lead to wide bid-ask spreads. This spread can impact order execution and price favorability. In some cases, it’s just better to wait until the market opens to decrease the spread and decrease the risk of lost money.

Volatility

Limited trading can impact volatility. You might see substantially larger peaks and valleys than you would during regular trading times.

Uncertain prices

After-hours prices may not be the most accurate reflection of the stock’s actual valuation. Even if the stock lists an attractive price pre-market, once the market opens, the price can quickly change depending on the overall market response to the valuation.

Limit orders

Many of the ECNs that accept pre-market orders only work with limit orders, which caps the maximum amount for a buy order and sets a floor for a sell order. Since limit orders won’t go through if the stock price is over or under the set threshold, then you might miss out on the trade altogether.

Competition with professional traders

The majority of pre-market traders are professionals that work for large companies or funds. Often, these traders have more information than the amateur trader and can make better purchases or sales.

Computer delays

Just like with regular-hours trading done online, you might experience lags, delays, or other computer issues that impact your trades. However, with the limited time frame of pre-market trading and the additional restrictions of limit orders, these issues can make or break your trade.

How to Trade Pre-Market

If you’re interested in trading on the pre-market, follow these steps:

1. Open an account

First, you’ll need an online trading account. Do some research and ensure the platform you select allows for pre-market trading, as not every trading application does. Open your account and add funds to get started.

2. Apply for pre-market access

Some platforms allow you to trade on the pre-market with no additional application or request. Others require you to ask for access. Submit an application or request for pre-market access if needed for your trading platform.

3. Do your research

Look at industry news and company announcements for stocks you’re interested in. Use that information to keep an eye on pre-market prices to see if there’s an opportunity for smart early morning investing.

4. Find your stock

Once you’re ready to make a trade, search for the company on your trading application. Ensure you have the right company, the accurate number of shares you want to buy or sell, and that you’re comfortable with the bid-ask spread.

5. Place your order

After you’ve checked that all the information for your order is correct, place your order. Remember, most ECNs only allow limit orders, so it’s vital you double check your numbers to make sure your trade has a strong chance of going through.

6. Monitor your order 

Since limit orders get canceled if there’s no interested buyer or seller available or if your proposed trade doesn’t meet the limit threshold, you should monitor it to see if it’s actually filled rather than assuming it will be filled. The bid-ask spread could change dramatically once the market opens, so ensure you’re comfortable with that prospect when you place your order.

The most active pre-market stocks change from day to day depending on a variety of economic factors. The best way to keep an eye on the pre-market and evaluate the activity is to watch a pre-market ticker. There are lots of tickers out there that show the most active stocks pre-market and other important indicators like NASDAQ pre-market gainers.

Pre-market trading can be incredibly beneficial in specific situations, like a huge announcement from a company or new regulations or other industry changes. However, it’s important to understand the risks and downsides before embarking on pre-market trading.