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Pre-market trading allows investors to open or close their stock positions before the regular market hours open. This comprehensive guide will review everything you need to know about pre-market trading, including what it is, how it works, and the risks and opportunities associated with it.
What is Pre-Market Trading?
The term pre-market trading refers to buying or selling stocks before the regular market opens. Pre-market trading occurs between 8:00 AM and 9:30 AM EST, right before the market opens each trading day.
Investors choose to trade before official market hours because it gives them a chance to act before the rest of the market does. Whether it is reacting to new data or events, pre-market trading can give you a leg up in the market.
How Do Market Sessions Work?
There are three sessions in which you can trade securities: the pre-market, regular market, and post-market. Each of these sessions serves a distinct purpose, but you must be aware of how factors like volatility and liquidity will change depending on when you trade.
Let’s dive into the details of each trading session:
The Pre-Market Session
The pre-market session generally occurs between 8:00 AM and 9:30 AM EST on every trading day. Some brokers may even allow their traders to begin as early as 4:00 am, but this will vary by the trading platform.
It is called the pre-market because it happens before the regular trading session and allows you to gauge the direction and strength of the market before it opens.
Trading in the pre-market can give you an idea of what the regular trading day might look like, which many investors use to their advantage when developing their strategies.
Although the pre-market session can provide investors with valuable information and an opportunity to get a head start, it is important to consider that there will be less volume and liquidity at this time. There aren’t as many traders active early in the morning, which can lead to larger bid-ask spreads.
Similarly, the lower volume of trades leads to higher volatility. It is possible to see larger swings in pre-market trading prices than you would during the other trading sessions.
The Regular Market Session
The regular market session is open for trading between 9:30 AM and 4:00 PM EST. The New York Stock Exchange (NYSE) and other similar U.S. securities markets operate during these hours on regular business days.
There are many more active investors during the regular market session when compared to pre-market trading, which means there is more competition. As a result, you can expect to see less volatility and smaller spreads between the bid and ask prices.
The After-Hours Session
The after-hours session occurs after the regular market has closed for the day, so it starts at 4:00 PM EST. The length of these sessions can vary based on the investment platform you choose, but they can run as late as 8:00 PM EST.
The volume in the after-hours session is a bit higher than that of the pre-market, particularly when companies release earnings or other significant news. However, most of this spark subsides and slows down by about 6:00 PM EST.
There are significant liquidity risks associated with after-hours trading, which can lead to large spreads and volatility.
Pre-Market Trading: Opportunities and Risks
While the opportunity to act on new information and get your orders placed before the regular session opens can be attractive, you must also consider the relevant risks.
For example, low liquidity during these hours will not guarantee a better execution price. In fact, the low volume of trades leads to a higher spread between the buying and selling price. When this happens, you may be forced to take a price on a trade that does not accurately reflect its fair value.
Other risks associated with pre-market trading include illogical price movements. It is much more difficult to predict price upticks and downticks during the regular trading session.
Pre-Market Trading Use Cases
Now that you understand what pre-market trading is – and how it works – you may be wondering what the best use cases are for buying or selling stocks at this time. The main uses cases for pre-market activity are placing urgent trades, acting on new information, and tracking economic indicators.
Place Urgent Trades
One of the best use cases for placing pre-market trades is to urgently close or open a position. Perhaps you need to liquidate some shares to access those funds or invest new money as soon as possible.
Regardless of your reasoning, pre-market trading allows you to take urgent action without waiting for the regular market session to open.
Act On New Information
Companies are strategic when it comes to announcing earnings reports and other important news. They avoid releasing this information during the regular session because they don’t want reactions to sway the value of their stock.
You will need to trade during the pre-market session if you want to act when these announcements are made.
Track Economic Indicators
Another reason that investors trade in the pre-market session is to track economic indicators. Many of these indicators are released at 8:30 AM EST and can lead to large price movements, so opening or closing out positions before the regular session can be beneficial.
FAQs
What Time Does Pre-Market Trading Occur?
Pre-market trading happens between 8:00 AM and 9:30 AM EST each trading day.
Are there Risks to Trading in the Pre-Market?
When you trade in the pre-market session, you may experience larger bid-ask spreads - and greater volatility since the volume of activity is much lower.
What are the Opportunities Available in Pre-Market Trading?
Pre-market trading allows you to act on information released before the market opens, such as company news or economic indicators. It essentially gives you a head start on the trading day.
Why Should You Engage in Pre-Market Trading?
You should engage in pre-market trading if you need to urgently open or close a position, want to act on new data, or wish to take advantage of an opportunity before the market opens.
Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.
As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.
Bruce Powers is an expert trader and technical analyst with over 20 years of experience in Forex, commodities, ETFs, cryptocurrencies and other assets. He is an active trader, technical and fundamental analyst, media commentator, educator and a writer. As an author for Traders Union, he contributes his deep analytical skills, expertise and understanding of the global economy and financial markets to provide market analysis and insights. Powers is also a frequent guest on business TV news shows.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.
