A Guide to the Risks and Opportunities of Pre-Market Trading

Pre-market trading allows investors to judge market sentiment and execute trades as news develops, but is considered riskier than trading during normal market hours

What is Pre-Market Trading?

In many U.S. stock markets, pre-market trading is a period of trading activity that occurs before the regular market session opens. For example, the New York Stock Exchange, which is home to the Dow Jones and S&P 500 stock indexes, and the Nasdaq, home of the Nasdaq 100, typically open at 9:30 a.m. Eastern Time, so pre-market trading begins a few hours prior to regular market hours.

Pre-Market Trading

Key Highlights

  • Pre-market trading is a period of trading activity on a stock exchange before the start of regular trading hours.
  • Pre-market trading is important because it allows for investors to judge market sentiment and execute trades as news develops.
  • There are many different risks involved in pre-market trading due to the lack of liquidity and price transparency, as well as trading restrictions that may be imposed by brokers.

Extended Trading Hours

Together with after-hours trading, which runs from the close of the regular trading day (usually from 4 p.m. to 8 p.m.), pre-market and after-hours trading is considered Extended Hour Trading. This has come about due to increased demand, especially from overseas investors that might operate outside of normal market hours.

Why is Pre-Market Trading Important?

Many investors and traders watch the activity and price action in pre-market trading activity to judge market sentiment and anticipated volume before the market opens.

And since U.S. stock markets are closed for weekends (and U.S. holidays), there might be significant market news that has occurred since the market closed on Friday evening, so pre-market trading on Mondays allows investors to get a gauge on how the market will open up.

Additionally, as market news often happens outside of regular market hours, such as earnings reports “after the bell,” both pre-market and after-hours trading provide investors a convenient avenue to react to this news outside the regular trading session. This activity can also be telling to investors which specific stocks are moving and actively trading prior to regular trading sessions.

Extended trading can also help investors gauge what happened overnight in other markets and countries.

Has an overseas competitor suffered some bad news? Has the sector received some bullish news overnight? Or has some macroeconomic or political event transpired that might impact a particular stock, industry, or broader markets as a whole? This allows astute investors and traders to get a jump on the rest of the market, before it opens.

What Time Can I Trade Pre-Market?

For the Nasdaq and NYSE, the pre-market trading session starts from 4 a.m. to 9:30 a.m., Eastern Time. Other stock markets also have varying premarket trading hours, such as:

  • London Stock Exchange Group (LSE): 5:05 a.m. to 7:50 a.m. (Regular trading session opens at 8 a.m. GMT)
  • Hong Kong Stock Exchange (HKEX): 9 a.m. to 9:30 a.m. (Regular trading hours start at 9:30 a.m. Hong Kong Standard Time)

There are also some prominent stock exchanges that do not offer premarket trading, namely:

  • Frankfurt Stock Exchange (FSX)
  • Euronext NV
  • Japan Exchange Group (JPX)
  • Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE)
  • National Stock Exchange of India (NSEI)
  • Toronto Stock Exchange (TSX)

How Do I Participate in Pre-Market Trading?

For market makers and other members of the stock exchange, they may place their pre-market buy and sell orders using their regular electronic trading systems, such as the NYSE’s Pillar System. Institutional investors would use the order entry and management systems provided by sell-side institutions.

For retail investors, they would use the platforms or avenues provided by their retail brokerage account, such as:

It is important to note that different brokers have different rules when it comes to when trading is allowed on their platforms, despite the exchange being open for pre-market trading. Additionally, an investor should always consult with their broker to ascertain which markets and instruments their broker offers.

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

Generally, most listed stocks can be traded during the pre-trade session. However, not all shares might have sufficient volumes to make premarket stock trading viable, such as small cap stocks. Options are not traded in extended trading.

In addition to individual stocks that are traded in the pre-market session, there are also futures that track the broader stock market. These futures trade around-the-clock in overseas markets, which allow investors not only an indicator of market sentiment but also allow investors a way to express their view on the broader market index, such as the Nasdaq 100.

How are Prices Determined in Pre-Market Trading?

Extended trading happens after the close, when a closing price has been calculated based on factors such as the last sale price. Investors can then decide if they are willing to buy and sell stocks at the offer and ask prices, respectively. At the end of the post-trading session, these stock prices are then used to form the basis of premarket prices.

Another way of transacting during extended trading hours is by the use of limit orders, which allows investors to only transact when the price gets to their desired level (i.e., the limit). This might be useful for investors to hedge some of their risk should the market swing significantly outside of the regular market hours.

Another thing to note is the lower liquidity during extended hours may impact the size of bid-ask spreads. This can be costly, especially if you are trying to buy or sell a large amount of securities.

Pre-Market Trading: Risks

That brings us to risks associated with pre-market trading. We mentioned wider bid-ask spreads due to the potential lack of liquidity. But the lack of liquidity also means that there is no guarantee an order will be filled in extended hours as the vast majority of trading occurs during normal business hours.

Given this lack of liquidity, prices may be more volatile. Volatility refers to the changes in price that securities undergo when trading, and in pre-market trading, the price you receive may be inferior.

Since the price setting is less transparent, the prices that are shown or transacted may vary significantly from the prices reflected at the end of the regular trading session or even with the opening prices at the next session. Even stock quotes may be distorted due to the lack of transparency.

As many market makers and investors might not be present in the market during pre- and post-market trading, there may be more arbitrageurs who are looking to take advantage of mispricings in the market for their sole benefit, especially if important financial information is announced during the extended trading session.

Lastly, as previously mentioned, it is also possible that retail brokers may impose other restrictions on their customers, which means further impediments in premarket trading.

More Resources

Thanks for reading CFI’s guide to pre-market trading. To learn more, see these additional relevant resources below:

London Stock Exchange (LSE)

Market Risk

Options: Calls and Puts

Technical Analyst

See all capital markets resources

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