Often, trading in stocks and securities is an activity that requires a lot of time and patience. However, that doesn’t mean that you shouldn’t look for opportunities to get ahead of the curve from time to time. For people who know how to read the market effectively and which stocks to watch, premarket trading can deliver a valuable chance to make money before the trading bell rings in the standard stock exchanges worldwide. However, before you can dive head-first into premarket trading, you need to understand what it is, where it comes from, and what the benefits of this kind of investment might be.
Today, we’re going to take a quick look at the background of early-hours trading.
What is Pre-Market?
The pre-market is the period of trading activity that occurs before the regular market session. The pre-market trading session typically occurs between 8:00 a.m. and 9:30 a.m. EST each trading day. 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.
Why does the stock market have pre-market and after-hours trading? If trades can occur outside the 9:30 a.m. to 4 p.m. market hours, then why not extend the trading hours altogether, or allow for 24/7 trading?
Suppose you grow vegetables and want to sell your produce at a local farmers’ market. Would you just show up any old day and time and hope for the best? Nah, you’d look at the designated hours that the farmers’ market is open, and only go then, when you know that customers will be around. The reason any marketplace sets hours is so that buyers and sellers know when to show up. And the same is true for financial markets.
In the old days, showing up at the same time was more obviously necessary — the traders at the New York Stock Exchange needed to be physically in the same place to buy and sell shares. But even now that most trades happen electronically, it benefits everyone if the exchange sets certain hours as the business day, so that buyers and sellers know exactly when everyone else will be ready to buy and sell. (For the New York Stock Exchange, those hours are 9:30 a.m. to 4 p.m., Monday through Friday.)
In response to new technologies and increased demands (particularly global demands), the stock market began offering extended hours that now allow you to trade shares as early as 4 a.m. and as late as 6:30 p.m. — but there are fewer buyers and sellers at those times. Most traders are busy having dinner with their spouses or asleep or whatever. So even small orders can distort the price; trying to sell just a few thousand shares of a stock might make its price plummet in after-hours trading, whereas, during the trading day, a similar order might find a buyer without affecting the price much at all.
In other words, there’s nothing to stop you now from trading late at night or early in the morning — except that you may find it’s as lonely as an off-hours farmers’ market.
Extended-hours trading (Not to be confused with Late trading)
Extended-hours trading (or electronic trading hours, ETH) is stock trading that happens either before or after the trading day of a stock exchange, i.e., pre-market trading or after-hours trading.
After-hours trading is the name for buying and selling of securities when the major markets are closed. Since 1985, the regular trading hours for major exchanges in the United States, such as the New York Stock Exchange and the Nasdaq Stock Market, have been from 9:30 a.m. to 4:00 p.m. Eastern Time (ET). Pre-market trading occurs from 4:00 a.m. to 9:30 a.m. ET, although the majority of the volume and liquidity come to the pre-market at 8:00AM ET. After-hours trading on a day with a normal session occurs from 4:00 p.m. to 8:00 p.m. ET. Market makers and specialists generally do not participate in after hours trading, which can limit liquidity.
Trading outside regular hours is not a new phenomenon but used to be limited to high-net-worth investors and institutional investors like mutual funds. The emergence of private trading systems, known as electronic communication networks (ECNs), has allowed individual investors to participate in after-hours trading.
Financial Industry Regulatory Authority (FINRA) members who voluntarily enter quotations during the after-hours session are required to comply with all applicable limit order protection and display rules (e.g., the Manning Rule and the SEC order handling rules).
Where Did Premarket Trading Come From?
For some people, premarket trading is an excellent opportunity. Getting ahead of the opening bell means that you can react to off-hours events and news instantly, therefore protecting your holdings and reducing your risk of larger losses. However, fewer buyers in the premarket, combined with volatility and low liquidity, means that trading can be a little riskier during the early morning.
The risks associated with this kind of trading might be one of the reasons why it took so long to be embraced by the US. There were actually countless countries already using early-morning trading long before the New York Stock Exchange caught up in 1991. It wasn’t until then, in the early 90s, that the NYSE decided that it was time to take advantage of the benefits of around-the-clock trading seen in other parts of the world.
Over almost three decades since then, the NYSE has delivered after-hours and premarket trading sessions using computerized trading with electronic systems. Some brokers will even allow you to start buying and selling assets in certain markets as early as 4:00 am, around 5 and a half hours before the NYSE opening bell rings.
Should You Try Premarket Trading?
Today, premarket trading has grown increasingly popular among a range of different kinds of investors. However, more often than not, it’s used by professionals to simply view the market and find potential trends in sales and purchases. Most investors know that the limited liquidity and high volatility of the premarket make it dangerous to get too deeply involved, which is why they simply stick to this space for the purpose of research.
Whether you can benefit from premarket trading will depend on the kind of strategy you’re using to build and manage your wealth in the stock markets. For instance, this kind of investing isn’t a good idea for people who have low-risk tolerance levels, because there’s always a chance that you might not be able to find a buyer when you need one. However, if you’re the kind of person who likes to react quickly to market news, then you might appreciate the freedom that premarket trading affords.
Additionally, for those who don’t want to trade exclusively within the traditional opening hours of the stock market, the after-hours trading environment exists too. However, some people find this trading space somewhat riskier than the premarket, because there’s more time between the closing time of the after-hours stage, and the opening bell the next day.