Pre-Market Trading : Works, Benefits, Risks, Timing & Securities Traded

What is Pre-Market Trading?

Trading takes place before the normal market session, which is called “Pre-Market Trading.” Every trading day, the pre-market trading time lasts from 8 a.m. to 9:30 a.m. EST. A lot of investors and traders look at the buying that happens before the market opens to get an idea of how strong and where the market is going. A limited number of orders can be filled through an “electronic market” such as an alternative trading system (ATS) or electronic communication network (ECN) before the market opens. Market makers can’t carry out orders until the starting bell at 9:30 a.m. EST.

Geeky Takeaways:

• Pre-market trading starts as early as 4:00 a.m. and goes until the market opens at around 9:30 a.m. Eastern Time, which is the start of the normal trading day.
• It gives some market players, like institutional investors and professional traders, a chance to buy and sell securities before the main market opens for the day.
• There is usually less trading activity before the market opens compared to regular trading hours. This can cause bid-ask spreads to get larger and price volatility to rise.

There isn’t a lot of buying going on before the market opens, so bid-ask spreads are usually pretty big.  A lot of private brokers let you trade before the market opens, but they may limit the kinds of orders you can place during that time. It is possible to start dealing before the market opens with some direct-access brokers as early as 4 a.m. EST, Monday through Friday. You should keep in mind that most stocks don’t move much this early in morning trading until there is news.

Also, there isn’t much trading going on because most stocks only have short prices. ETFs that are based on indexes, like the SPDR S&P 500 ETF (SPY), have quotes that change because of dealing in the S&P 500 futures contracts. In the event of a big gap up or down in the S&P 500 futures, many of the most popular top positions in benchmark indices may also move. Trades can happen as early as 4:15 a.m. EST in large-cap stocks that a lot of people own, like Apple Inc. (AAPL). 

Before pre-market dealing, trading after hours was added. By adding an hour to trade hours in June 1991, the New York Stock Exchange (NYSE) made after-hours trading possible. The move was made because of more competition from private exchanges that were open longer hours and foreign exchanges in London and Tokyo. In two trading sessions, 2.24 million shares were bought and sold. Over years, as exchanges got increasingly automated and the Internet reached more people around the world, NYSE started opening more trading hours. Eventually, pre-market dealing was allowed from 4 a.m. to 9:30 a.m each day.

How does Pre-Market Work?

1. Buying or selling stocks before or after market hours is a little different from investing during regular business hours. Orders go through a market like the Nasdaq or New York Stock market during the trading day.

2. Trades that happen after normal business hours use an electronic communications network, or ECN. The ECN is a tool that your trader uses to match orders to buy and sell and to make trades. Traders can only use limit orders on an ECN, which is a disadvantage, but it does the job well.

3. You may be used to putting in market orders for trades in stocks, which are filled at the rate that is best at the time of the day. You have to set your own price with a limit order, and there’s no promise that the trade will go through. But if it does go through, you can be sure it will go through at your price or better.

4. Sign in to your trading account before the market opens if you want to make a trade. Your broker may have a different section of their website or app where you can place trades outside of normal business hours. The broker will also tell you when you may put an order for trade before the market opens.

5. This is usually any time between the end of the after-hours trading session and the end of the premarket trading session. You should know that most extended-hours trades are only valid until the end of the trading session. They don’t last through regular business hours.

6. You will need to send in a limit order once you know where to put your order. You choose the price you’re ready to accept and the number of shares you want to buy or sell. After you put in an order, the exchange will send it to the ECN. The ECN will then use limit prices to try to match your order with others on the network.

Let’s say you want to buy 100 shares at $50 each. The network will try to match your order with an order to sell at least 100 shares for $50 or less. If it finds an appropriate match, it makes the sale. After two trading days, everything is settled, just like during normal business hours.

Benefits of Pre-Market Trading

Pre-market trading and after-hours trading also known as Extended-hours selling, includes trading before and after market hours, has the same benefits:

1. It Gives a Chance to Respond Early to Overnight News: Retail investors can respond to overnight news during pre-market trading, which happens before the regular trading session starts. This kind of news could be corporate earnings (though most companies report earnings after the markets close, not before the open), a release from a big company, overnight breaking news like a change in geopolitics, or news from other countries. One thing to keep in mind is that the way people reacted to this news before the market opened could change during the trade day. The low trading volume before the market opens could be a sign of weakness or strength that doesn’t hold true when the market opens and normal trading volumes are met. In this case, a stock that posts disappointing earnings might be down a lot in pre-market trading, but it might turn around and end the day higher during the regular session.

2. Very Convienent: The ability to trade at any time is very helpful for people who want to spend on their own, since not everyone can trade during normal market hours. To be able to start the day early and make deals before the market opens is a big plus for most people whose lives are very busy.

3. Get Ahead of the Other People: Smart traders and investors who know how the market works and have experience dealing after regular business hours may be able to buy or sell stocks at better prices during the pre-market than during the regular session. It’s only possible if the stock doesn’t fully discount the news before the market opens and the response to news about the stock before the market opens is correct. In this case, a stock that trades higher in pre-market will continue to trend much higher during regular trading, while a stock that trades lower in pre-market will continue to trend lower during regular trading.

Risks of Pre-Market Trading

Now let’s talk about the risks of dealing before the market opens.

1. Limited liquidity: There isn’t as much money moving between buyers and sellers of stocks in the pre-market as there is during regular trading, when there are a lot of traders and investors. Because of this, trading volumes before the market open are usually only a small part of trading volumes during the normal session. There is less liquidity, more instability, and wide bid-ask spreads when there are not many trades.

2. Uncertainity: The prices of stocks that are traded before the market opens may be very different from the prices of those stocks during normal trading hours. Pre-market stock prices may only show prices from one or a few electronic communication networks (ECNs). This is because trade volumes vary a lot between pre-market and regular sessions, which can have an effect on prices. During normal trading hours, prices for stocks come from many exchanges, ECNs, and market makers, which helps find the best prices. The stock quotes shown are a compilation of the best bid and offer from all trading sites.

3. Limit Orders Might not be Carried Out: This is because many brokerages will only take limit orders during extended trading hours to protect clients from prices that go against them without warning. You can only carry out a limit order if the price is at least the limit price. One of the good things about limit orders is that they let the owner know the highest or lowest price at which a stock can be bought or sold. This does not mean that the order will be filled if the market goes away from the limit price.

4. Institutional Players are a Threat: In pre-market trading, there is an uneven playing field for retail traders because many of the other traders are institutional and expert traders with access to better and more up-to-date information and much bigger bankrolls.

Because of these risks, only traders with a lot of experience should trade before the market opens. This is because the probabilities are against regular traders. Traders who have been doing it for a long time know how to read the many subtleties that make trading difficult. For example, they can tell if the pre-market reaction to news is an under-reaction or an over-reaction and know when to make a decision about trading issues like buying or selling stocks, opening a new position, or setting limit prices at certain levels.

Pre-Market Trading Time

Trades before the market open can begin as early as 4 a.m. EST, but most of them happen between 8 a.m. EST and 9:30 a.m. EST, when normal trading starts.

Who Can Trade in Pre-Market?

A certain group of market participants can trade before the market opens, as long as they have access to the trading sites that allow it. These are the main types of people and businesses that can trade before the market opens,

1. Institutional Investors: Hedge funds, mutual funds, and pension funds are examples of institutional investors that can usually trade before the market opens. These groups trade before the market opens to make changes to their accounts based on overnight news or events that could have an effect on the markets.

2. Professional Traders: A lot of the time, pre-market trading is open to professional traders. This includes proprietary trading companies and individual traders with advanced trading accounts. These traders might be able to profit from changes in prices that happen before the market opens.

3. Brokerage Clients with Early Access to the Market: There are some brokerage companies that let their clients trade before the market opens. This session is open to investors who have accounts with these brokerages and choose to trade before the market opens.

4. Market Makers and Specialists: Market makers and specialists are very important for keeping the market liquid. They may trade before the market opens to help make trades and help set rates.

5. Individual Investors: Individual investors don’t have as much access to pre-market trading as they do to normal market hours, but some brokerage platforms do let their retail clients trade before the market opens. But not all brokerage companies offer this feature, and there may be requirements to be eligible.

What Securities Can Be Traded in the Pre-Market Session?

In the pre-market session, only stocks that are on the stock market can usually be sold. But not all stocks. Small-cap stocks, stocks with a limited float, or stocks that aren’t owned by many people, might not have enough trading volume to make pre-market trading work. In the pre-market time, you can’t trade options.

Difference Between Pre-Market and After Hours

Basis	Pre-Market Trading	After-Hours Trading
Timeframe	Before the market officially opens, starting around 4:00 a.m. and finishing at 9:30 a.m. Eastern Time.	After the market closes, which is usually between 4:00 p.m. and 8:00 p.m. Eastern Time, though some sites may keep the doors open later.
Participants	Individual investors, traders, and institutional investors can all use pre-market trading sites.	Participants are the same as in the pre-market: traders, institutional investors, and individual investors who can access trading tools after market hours.
Volume and Liquidity	Lower trading volume compared to regular hours, and liquidity may be limited. Prices can be more volatile due to fewer participants.	Generally lower trading volumes and limited liquidity compared to regular hours. Prices may be more susceptible to significant swings.
Bid-Ask Spreads	Bid-ask spreads may be wider compared to regular hours due to lower liquidity.	Bid-ask spreads may be wider than usual during normal trading hours, just like they are before the market opens.
News Impact	News and events that happen overnight or prior to the market starts can have an effect on prices.	Prices can react to news and events that are released after the official market closing.
Availability	Not all stocks are actively traded during pre-market hours, and availability may vary.	Similar availability like Pre-market trading
Brokerage Platform Access	Availability of pre-market trading may vary by brokerage. Not all platforms offer this feature.	Availability of after-hours trading may vary by brokerage. Not all platforms offer this feature.

Frequently Asked Questions (FAQs)

Who can buy before the market opens?

No one is forbidden to buy before the market opens. You can place an order for the premarket session if you have a brokerage account and can connect to an electronic messaging network.

What is ‘pre-market trading,’ and when does it happen?

People buy and sell securities before the official start of the normal trading session. This is called “pre-market trading.” It usually happens in the morning, starting as early as 4:00 a.m. and going on until the market starts for business at around 9:30 a.m. Eastern Time.

Who is allowed to trade before the market opens?

Trading before the market opens is possible for institutional investors, professional traders, market makers, some individual investors who have access to pre-market trading platforms, and customers of brokerages that allow trading before the market opens.

What kinds of assets are traded a lot during pre-market hours?

There are different kinds of frequently traded securities that can be found during pre-market hours. There may be some widely traded stocks available, but not all securities may be trading very much at this time.

How does liquidity in pre-market trading compare to regular market hours?

Usually, there is less buying activity before the market opens than during normal market hours. When there are fewer traders, bid-ask spreads may get wider, and prices can change more quickly because there are fewer people dealing.

What are the risks of trading before the market opens?

There are risks in pre-market dealing, such as less liquidity, wider bid-ask spreads, and more volatile prices. Also, not all brokerage systems allow pre-market trading, and there may be rules and requirements for who can participate.

Can I place any kind of order during pre-market trading?

Certain types of orders may not be able to be made during pre-market hours at some brokerages. It’s important to check with your exchange to see if there are any restrictions on the types of orders that can be placed before the market opens.