How to Trade in PreMarket

The stock market is open from 9:30 a.m. until 4 p.m. ET on weekdays. But that doesn’t stop certain traders from getting an advantage over others and trading outside of market hours in extended-hours trades. You can place positions outside of regular trading sessions can happen premarket or after-market trading.

The main reason traders engage in extended-hour trading is to optimize their results, and they do it by reacting to off-hour news and events. The market’s standard hours may not be suitable for international traders, and fewer participants are in the market when it’s not trading during standard hours. Benzinga wants to help you get an edge over others by detailing crucial aspects of premarket trading to increase your chance of profitability.   

How to Trade After Hours: Step by Step

The market closes on business days at 4 p.m. ET, but global events are perpetual. Numerous factors affect the market, and some traders don’t want to miss out on the action. So they trade after hours, but how do they do it if the markets are closed?

Traders use electronic communication networks (ECNs) to connect via a digital network. An example of an ECN is the New York Stock Exchange (NYSE) Arca. Keep in mind that each ECN offers pre/post-market trading during various hours.  

Here is a step-by-step process to make postmarket trading convenient.

Choose a broker that offers after-hours trading: Not all brokers offer trading after the market has closed. And the ones that do, each have stipulated hours. As an example, Charles Schwab Corp. (NYSE: SCHW) offers trading from 4 p.m. to 8 p.m. ET.

Log in to a brokerage account: After logging in, you select the security you wish to buy or sell.

Place a limit order: You place a limit order exactly the way you would during normal market hours.

Keep in mind that your broker may charge additional fees for after-hours trading. After you’ve opened a position, the broker sends it to the ECN to match it to a corresponding order on the network.

Why Trade in Premarket?

The premarket trading session, which provides several advantages, typically starts at 8 a.m. E.T but can begin as early as 4 a.m. E.T. One of the benefits is that traders can react to global events, which usually happen outside of market hours. International corporations make announcements during various hours, and traders have more time to gauge economic indicators.

Although premarket traders experience liquidity issues, they also stand to make bigger profits.

Current Events

Current events are ongoing and do not occur only during market hours. Significant global events such as wars have a drastic impact on the stock market. When such events occur outside of market hours, traders do not want to wait for the market to open to place positions.

After all, trading is about being proactive, not reactive. Traders anticipate the effect on the market from global events and open positions before the market opens. That helps them to maximize profits and avoid gapping — the opening price differs from the closing price.

Economic Indicators

Economic indicators help traders take advantage of the market’s history, trends and future predictions. Analyzing that knowledge takes time, and it’s difficult for traders to consume that information during market hours.

To analyze the market effectively, some traders study that day’s price action then look at macroeconomic events that influenced the price and try to predict its direction. Traders using economic indicators need to examine the impact that inflation, unemployment, interest rates and other factors had on the market.

Corporate Announcements

In many cases, corporations that release news about operations can have a tremendous impact on their share price. It’s difficult for traders to profit when prices are highly volatile, so they get in before extreme price action.

Premarket traders can often manage to place trades before volatility erupts because most corporations make announcements after the market has closed. They announce earnings, the appointment of a new CEO and layoffs when most traders have closed their charts. They do that deliberately because they know the market could overreact from fear, causing their stock price to plummet.

Trading after corporate announcements enables traders to react better to news and take advantage of the stock’s fair value.

Liquidity Issues

Choosing to buy a stock means that somebody has to be selling it or vice-versa. When the market is closed, fewer traders have placed positions. Although you want to buy stocks, it doesn’t mean that a seller is offering.

That used to be an issue only for institutional investors when retail traders weren’t allowed to premarket trade. Now that retail traders can participate, it’s also an issue for them. That problem is exacerbated for traders wanting to profit from stocks of small corporations, which usually have much lower trading volume than large-cap organizations.  

Higher Risk, Higher Reward

Trading in the premarket enables investors to profit from potentially drastic price movements, but a higher reward is usually accompanied by higher risk. Placing a trade in the premarket could mean that traders incur higher spreads — the difference between the buy (bid) and sell (ask) prices quoted for a security.

It’s common for spreads to be wider during premarket than regular trading sessions because a small number of traders haven’t agreed on a fair price. That means traders might have to open positions at prices not reflective of fair value. 

Drawbacks of Extended Hours Trading

Trading when the market is closed to gain an advantage over others might sound like a fool-proof strategy, but it hold several risks.

Limited features: Some brokers offer different features during market hours and after-hours trading. One example is limiting orders to a specific number of shares. Another example is offering specific shares only, usually the most popular ones and available on one exchange.

Traders may also experience that their positions are valid only for a particular session and get closed before the start of the subsequent session.

System errors: It’s not uncommon for traders to face system glitches when trading outside of normal hours. One of the main issues is delays in the execution of orders. When glitches occur, after-hour technicians may take some time to restore the system.

Because such problems, some positions may not get filled until the market has opened.

High volatility: Although volatility can be profitable for some traders, it can also catch them off guard. The low volume in premarket trading and wide spreads mean that unexpected and highly volatile movements are possible.  

Varying prices: The prices that traders see during the premarket are those of each ECN. It’s possible that an ECN’s prices vastly differ from consolidated prices — quoted during market hours. That factor could result in equity prices differing when the market opens.

Compare Stock Brokers

Finding a premarket broker can be challenging because you have to analyze several factors to determine the most reliable one. Benzinga has made the search easier by providing the best premarket brokers.

Frequently Asked Questions