Pre-market trading is trading that happens before normal stock market opening hours. While it was once exclusively available to institutional investors, more online brokers offer extended trading hours for investors. Pre-market trading opens opportunities for investors to act on after-hours news that can affect trading prices at opening. Read on to learn how to take advantage of pre-market trading, with detailed pros and cons.
What is Pre-Market Trading?
Pre-market trading is stock trading activity that occurs before regular market sessions. Regular pre-market trading happens between 8 am and 9:30 am. EST, while early premarket trading starts as early as 4 am EST.
Investors and traders watch pre-market activity and act according to new market information. For example, companies often release important news like a quarterly earnings report outside of normal trading hours. If this is released early in the morning, well before the market opens, investors may initiate trades based on this new information.
Some companies also make major announcements about partnerships, new products, or executive changes early in the day before regular trading hours. These announcements, especially when they indicate changes in cash flow, reserves, company performance, or leadership, may significantly impact how the market values a stock.
These press releases and major changes can cause overnight price changes, and that is why you should consider trading on the early morning news for potentially higher returns. In addition, many investors and traders watch the pre-market trading activity to judge the strength and direction of the market in anticipation of the regular trading session, gaining deeper market insights.
How Does Pre-Market Trading Work?
Pre-market trading is the trading actions initiated by investors before 9:30 am EST. Normally, this is the period between 4 am and 9:30 am EST.
During normal trading hours, you can buy or sell stock through an exchange like the Nasdaq or New York Stock Exchange. For pre-market trading, you can only execute limit orders through an electronic market, alternative trading system (ATS), or electronic communication network (ECN) to match buy and sell orders and execute trades.
Pre-market trading activity is generally limited in both volume and liquidity. For that reason, many retail brokers limit the types of orders that can be made during the pre-market period. Unless there is major news, most stocks have very little trading activity. Liquidity is thin, and you’ll only usually see significant movement in funds like ETFs or index funds in case of a significant movement in the S&P 500 futures market.
Small-cap stocks often do not have sufficient volumes for pre-market trading. Stocks that have a limited float or are not widely held are usually not traded on the pre-market. You also cannot trade options in pre-market sessions. However, some large-cap, widely held stocks like Apple, Amazon, or Meta tend to get more volume of pre-market trading.
5 Steps for Pre-Market Trading
If you’re ready to take the path of the early bird and begin your trading day before the market officially opens, you’ll need to work with a broker to execute trades. Here are the steps to take.
Step 1: Monitor the news
Pre-market trading only makes sense in most cases when press releases or other significant announcements affect investor sentiment. Look for news such as leadership changes, quarterly earnings reports, partnerships, mergers, or acquisitions. Benzinga Pro allows you to monitor the news in real time and take advantage of pre-market trading even before the news reaches other investors.
Step 2: Choose a Brokerage
You will need to work with a brokerage that offers pre-market trading. You can ask your existing brokerage or search online. To get started, here’s a few major brokers and the hours of trading they offer. All times noted are Eastern Standard Time (EST).
- Webull allows pre-market trading from 4 am to 9:30 am.
- Interactive Brokers lets you execute premarket trading in its “IBKR Pro” accounts from 4 am to 9:30 am and in its “IBKR Lite” accounts from 7 am to 9:30 am.
- TD Ameritrade offers pre-market trading from 7 am to 9:28 am.
- Charles Schwab allows pre-market orders from 8:05 pm on the previous trading day until 9:25 am. Pre-market trades are executed between 7 am and 9:25 am.
- E*TRADE offers pre-market trading from 7 am to 9:30 am.
When choosing a brokerage, look at trading hours, available stocks, trading volume, and user reviews to choose a reliable service that matches your trading needs.
Step 3: Research New Opportunities
Trading before the markets open offers significant advantages for investors who want to act quickly on press releases and other early-morning company announcements. Researching markets, understanding the likely impact of certain announcements ahead of time, and creating watchlists of target companies and stocks can help improve success in your morning trading.
To start, brokerage information services often provide detailed off-hours market trading data. You may have free access with a brokerage account. You should be able to see the current bid and ask prices for specific securities. These services also allow you to compare price changes from the previous period’s close.
There are a number of free resources for investors to get comprehensive pre-market data. The Nasdaq website, for example, offers comprehensive quotes on shares listed on the Nasdaq. The site shows every trade made in off-hours (pre-market and after-market) trading, including the price, time, and size of trades. Benzinga also offers premarket movers and news.
Step 4: Set Limit Orders
Once you’ve researched stocks, get ready to act on news or press releases. Trading before the market opens generally only allows limit orders. You can set one or more limit orders based on the day’s news and market activity.
Step 5: Execute trades
When your limit is reached, your pre-market broker will execute the trade. If the limit isn’t reached, it usually expires at the end of the pre-market trading session and doesn’t carry over into regular trading hours. If you want to execute the trade during normal market hours, you’ll need to re-initiate the trade.
Pros of Pre-Market Trading
There are significant advantages to trading before the market opens. Here are the highlights:
- React quickly: When companies put out press releases in the early morning, it can affect a stock’s value, and you may have a strong indication to buy or sell. With pre-market trading hours, you don’t have to wait until the market opens to execute that trade, which can help you get ahead of other investors.
- Big price change opportunities: The initial reaction of the overall market to news may differ from your fundamental analysis of long-term price movements. You could take advantage of short-term reactions or big price changes in the pre-market session.
- Convenience: If you cannot place trades during the regular workday, you can use premarket or aftermarket hours to execute trades when it fits into your schedule.
Cons of Pre-Market Trading
While pre-market trading is one additional opportunity for your trading portfolio, there are additional considerations and disadvantages. Here are the cons of pre-market trading to weigh.
- Limited volume: You may not get the best price available with limited volume. ECN providers don’t necessarily communicate with each other, limiting possible trade matches. When you execute trades during normal trading hours, this limitation doesn’t exist, ensuring you get the best available price.
- High spread: When the bid-ask spread between buy and sell prices is much wider than in normal trading hours, it can be more difficult to gauge the actual market price when placing orders.
- No guarantees: With only a small percentage of investors participating in premarket trading, there’s no guarantee that your trade will execute. This, combined with the single ECN most brokers use, means there’s a high likelihood your trade doesn’t go through.
Should You Be Pre-Market Trading?
Pre-market trading, as part of a comprehensive investment strategy, offers investors additional opportunities to execute trades based on current information. With tools like Benzinga Pro, which offers real-time news independently ahead of major media services, you could be well-positioned to take advantage of pre-market opportunities. As with any investment, understand the risks, diversify, and research companies, industries, trends, and positions to better prepare for new pre-market trades.
Frequently Asked Questions
Q: How to do premarket trading?
A: To participate in premarket trading, you need to work with a broker that offers premarket trading. Then, research and understand companies and monitor the news for press releases or other events that can affect trading activity to take advantage of early morning opportunities.
Q: Is it good to trade during pre-market?
A: You can take advantage of market news ahead of other investors by trading during pre-market hours. However, there are limitations to trading volume, which means pre-market trading comes with pros and cons.
Q: Can you make money pre-market trading?
A: Yes, executed well, you can make money in pre-market trading. As with all other areas of investment, you’ll take on risk, so research and diversification are essential.
Q: Who trades at 4 am?
A: There are a number of reliable brokers you can choose from who trade at 4 am. Interactive Brokers and Webull are two that both offer premarket trading from 4 am.
Q: Can I place a buy order before the market opens?
A: Yes, some brokers allow you to place a buy order before the market opens. Charles Schwab allows premarket trades from 8:05 pm EST the night before, although trades are only executed from 7 am the next morning.
Q: What are the risks of pre market trading?
A: The risks of premarket trading include the possibility that the trade doesn’t go through due to a lack of liquidity or a limited broker ECN. Pre-market trading also carries similar risks to other investment strategies, including sudden changes in investor sentiment or loss of capital value.