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Unlike the Forex market, the stock market has set hours within which it operates. However, you can still buy and sell stocks even before the official opening hours. Such trades are called premarket trades because you are trading before the market has begun its operations. This type of trading allows traders to react to events and news that might have occurred when the market was closed. Since this not a conventional type of trading, there are limited buyers, and the volatility is also high. This makes it risky for new investors and traders. So, what does premarket trading mean?
How does premarket trading work?
Premarket trading allows traders to buy and sell stocks before official market hours if the broker offers this option. Some brokers do not offer trading in the premarket at all. The premarket trading benefit is a possibility for traders to react to off-hour news and events.
Just like the NYSE (New York Stock Exchange), U.S. securities markets are also open from 9:30 AM to 4:00 PM (EST) for regular trading. However, thanks to electronic trading, it is now possible for traders to buy and sell stocks even the market has officially opened. These electronic communication networks, also known ECNs, can operate in advance as they are not bound to a physical location. In simple terms, traders use a digital network to buy and sell stocks.
An example of ECN would be NYSE Arca. When one of the early ECNs merged with NYSE, NYSE Arca was created. Instinet is yet another ECN that began its operations in the late 1960s. Different operating hours are permitted for premarket trading by ECNs.
Remember, stop-loss orders will not execute during premarket hours.
When Does Premarket Open?
Premarket trading in stocks usually starts from 4 a.m. to 9:30 a.m. EST. Some brokers allow trading from 4:00 AM (EST), but typical premarket trading hours are from 8:00 AM to 9:30 AM (EST). After-hours trading takes place from 4 p.m. to 8 p.m. However, traders can not trade all assets during the premarket trading period, and some types of orders can be limited.
When does premarket trading end?
Premarket trading ends at 9:30 AM EST. At that time, US stock exchanges start, and traders can trade between 9:30 a.m. and 4:00 p.m. EST regularly.
Pre-market trading hours are similar to after-hours trading hours, the difference being that pre-market hours begin before the market opens, that is, before 9:30 AM (ET). There are various premarket strategies such as gap and go pre-market strategy.
The pre-market opens at 8:00 AM ET. Approximately one and a half hours before the official market hours. The reason for trading before others is the same as after-hours trading, taking advantage of changing stock prices before others.
The concept of premarket trading is a fairly new one. The NYSE, in 1991, allowed trading beyond regular market hours as a response to around-the-clock trading.
This decision promoted computerized international trading as people worldwide were able to participate due to extended hours. With the opening of the market in the U.S. at 4:00 AM (EST) to its closing at 9:30 AM, trading can occur at any time in this window. You can also trade after the curtain has been drawn on the market. That is known as after-hour trading, from 4:00 PM to 6:30 PM (EST). It must be noted that this type of trading can continue beyond this time window through internal exchanges.
The official operating hours of the US Stock Market run from 9:30 AM to 4:00 PM. For these six and a half hours, Wall Street remains abuzz with investors and traders across the globe. The market sees millions of transactions every day as soon as the opening bell strikes. To avoid such a crowded marketplace, some traders have found a loophole. Trading before the market opens allows you to take advantage of less competition. These trading hours can be extended once the market has closed. This is known as after-hours trading.
Let’s see how you can take advantage of trading during these odd hours.
Trading Outside the Official Hours
Let us first assert that you can trade at any time, and it is completely ethical and legal. The market is more active during conventional hours, so most action takes place during that time. However, if you see a window of opportunity outside those hours, you can take that up.
You can trade well before the market officially opens and after it closes as well. However, if you decide to do so, be aware that the playing field will not be the same.
Factors that Affect Premarket Trading
The majority of people who do premarket trading are generally well-funded institutions, but there is no defined rule that retail traders cannot try their hand at it. So, technically, anyone can test the water with premarket trading.
Premarket trading can be used in more ways than one. Some investors use it to keep track of where individual securities and markets might be heading. Changes in security prices and the trading volume can be used to speculate how the rest of the trading day will pan out. Premarket trading is also indicative of the market sentiments to breaking news. Political instability, overseas events, and several economic and geopolitical factors can affect securities and markets.
For example, a corporation operating in a different or the same time zone may release a report on their earnings after the official trading hours. If the announcement is different from the market expectations, this could influence the respective stock’s price expectations the next day. Thus, depending on what would be beneficial, a premarket trader may buy or sell stocks before the rest of the market reacts to the news.
Events like changes in regulations and court rulings can also trigger premarket interests. If a stock is upgraded or downgraded by an influential analyst, it may also influence the market.
Premarket Trading Risks
Trading before 8:00 AM (EST) might not be very beneficial, but it still certainly involves a degree of risk. There may be an increased trading volume, but any news or rumor can increase the gap between ask prices and bids for stocks.
The number of trades in premarket trading is limited, making it difficult to find sellers and buyers at the hours of your liking. This makes trade execution and price determination more difficult, especially with fewer traded stocks. As a result, even the stocks that are widely held can be difficult to trade.
Stock prices in premarket trading are more volatile. Since the volume is limited, the prices can fall and rise more rapidly than expected. Therefore, if you are comfortable with moderate trading, premarket trading can give you significant losses.
In addition to that, the prices that you get in premarket trading may not paint an accurate picture of what you might see when the regular market opens. As a result, these prices and trends can be misleading and deceptive.
Premarket prices and trends are to be taken lightly. This is because they can change drastically during regular trading hours. This is why only experienced traders should consider premarket trading as they are not easily deceived.
Premarket Trading vs. Regular Trading
The competition is more intense during the premarket trading hours because of the lack of investors and traders. This makes premarket trading less advantageous for individual investors because professional traders have more knowledge and a better network.
If you are operating on an ECN which is incompatible with the ECN of another investor, you might not get to complete the trade. However, your trade will be slowed down or completely blocked if there is a technical delay from your brokerage’s end.
Both the markets have very different rules, which may also vary among different brokerages and ECNs. Therefore, you should first weigh all your options.
The premarket is time-bound. Suppose your time-limited order may get canceled if it does not get executed during premarket trading hours. If you have entered an order during premarket trading hours that couldn’t get executed, you can still execute it during regular trading hours. Similarly, if you have entered an order during regular trading hours, you can take it forward during premarket trading hours.
Does Fidelity allow premarket trading?
Yes, Fidelity accepts premarket orders from 7:00 – 9:28 a.m. EST and after-hours orders from 4:00 – 8:00 p.m. EST. During premarket trading and aftermarket trading, certain stocks on Fidelity.com of the major U.S. stock exchanges and Nasdaq can not be traded.
Traders can visit the Premarket trading CNN page and check interesting premarket trading stats.
Premarketing risk assessment
Trading and investing in stocks involves a certain degree of risks, to begin with. These risks can magnify when you are operating outside what is deemed traditional. According to the SEC (Securities & Exchange Commission), trading in the pre-market and after-hours session involves the following eight risks:
- 1. Inability to act or get a clear picture
At times, firms only allow you to see the quotes during after-hours but don’t allow you to act upon these quotes. It must also be noted that these quotes might be coming from a firm’s one trading system. Therefore, it is important to cross-check with your broker before acting upon these quotes.
- 2. Lack of Liquidity
Since more traders in the market during traditional trading hours, buying and selling stocks is easy and happens fluently. However, since fewer participants during off-the-market hours and trading volume are low, executing some trades becomes more difficult.
- 3. Wider Spreads
A spread is a difference between the asking price and the bid price. A tight spread gives more profit-making opportunities to the traders. Since the trading activities are less, wider spreads are offered to the traders. This ultimately translates into fewer profits.
- 4. Price Volatility
Needless to say that these trading sessions witness higher price volatility. The price fluctuation is especially more prominent with stocks that have limited trading activities.
- 5. Uncertain Prices
Along with price volatility, there is price uncertainty as well. During pre-market and after-hours trading sessions, the stock prices you get during pre-market and after-hours trading sessions may not reflect upon the prices you may get during traditional trading hours. Stock prices may rise or fall after or before the regular trading hours and may go back to their starting point once the market opens again. So there is a lot of uncertainty around it.
- 6. Biased Towards Limit Orders
A limit order is a great tool that can protect your capital. Unfortunately, some electronic trading systems are biased towards them. As a result, you cannot use them in off-hour trading.
- 7. High Competition
It should be noted that most traders who trade during pre-market and after-hours sessions are professional and well-funded traders. Mostly, institutions like mutual funds are a part of this market, creating big competition for individual traders.
- 8. Computer Delays
Computer delays are real issues when you are not trading during the official trading hours. Many traders and investors have reported delays in order execution and cancellation. This can be consequential when it comes to profits and losses.
After Hours Trading
What is After-Hours Trading?
After-hours trading occurs after the market closes, after 16:00 EST for New York Stock Exchange (NYSE) and the Nasdaq, when an investor can buy and sell securities outside regular trading hours. Each trading platform has a different time range that traders can use for after-hours trading.
Generally, trading done between 4:00 PM and 6:00 PM (EST) is labeled as after-hours trading, but it can go beyond this time frame as well.
After-hours trading times
- Premarket trading for a typical ECN broker is between 4 p.m. and 8 p.m.
- Schwab allows after-hours trading from 4:05 p.m. to 8 p.m. EST.
- Wells Fargo allows after-hours trading from 4:05 p.m. until 5 p.m. EST.
- TD Ameritrade offers trading 24 hours a day, five days a week.
The next question is, why would you want to trade when the stock market has closed?
The stock price depends a lot on the company reports, which are generally released either before 9:30 AM or after 4:00 PM. Whether the market is in session or not, stock prices move constantly. If the stock value is changing, people would naturally like to take advantage of it before other people. This makes after-hours trading important.
Why is there after-hours trading?
After-hours trading exists because of huge global demands and the presence of new trading platform technologies. Now, trading hours can be extended so more participants can be involved in trading. In addition, most brokers offer standard commissions during regular trading, premarket, and after-market trading.
As the name suggests, after-hours trading refers to the trading done beyond the conventional trading time. In the USA, after-hours trading begins post 4 PM (EST). This is when the exchange of most major stocks comes to a halt in the United States.
When does after-hours trading end? After-hours trading can continue till 8 PM, but traders need to keep in mind that there will be slim trading options as time progresses. Traders can conduct after-hours trading through ECN (electronic communications networks.
After-Hours Trading: Key Points
After-hours trading is done once the official trading hours have ended. Simultaneously, fewer traders and investors active once the market has officially closed, but after-hours trading offers several opportunities. These key points will help you to understand how you can capitalize it:
The Spark
One of the best advantages that after-hours trading offers is the possibility of leveraging any news break that might occur after the stock exchange has closed. You can buy or sell your stock before others, depending on the nature of the new.
Volume
Most of the commotion occurs in the exchange when the market opens or at the release of the news. As the hour’s progress, the activity fades away. Fewer transactions take place around 6 PM and after that. Since the volume of traders engaged in the market is less, it can make trading after-hours riskier.
Price
Along with the uncertainty around the volume of transactions, the prices are also not competitive. The spreads are generally wider as there are fewer people involved. Since the difference between the asking price and the bid is more, the traders make fewer profits.
Participation
It would help if you kept in mind that institutions and companies cannot trade after hours. They can choose to stay closed till the market opens again. With decreased volume, wider spread, and less participation of investors and brokers, after-hours trading can be quickly deemed riskier than regular trading.
All the above points make a few things very clear:
- The possibility of a stock falling sharply during the after-hours is highly likely. It can rise again when the market opens the next day.
- Various institutional investors behave differently once the market closes. This makes it difficult to predict the price actions when trading in the after-hours.
- Pushing the prices in either direction is relatively simple because of less trade volume and broader spreads. While this can make things riskier, you can also take advantage of it and make an impactful trade even with fewer stocks.
After-Hours Trading Real Example
To understand the benefits of after-hours trading, considering the example of Nvidia Corp., would be a great idea. Also known as NVDA, their earnings for February 2019 can teach aspiring after-hours traders the positives and negatives of operating during these unconventional hours.
On February 14, NVDA announced its quarterly results. The stock price subsequently saw a significant jump. It rose from $154.50 to $169 within 10 minutes of the announcement. The volume of transactions continued to remain steady till 4:30 PM but ultimately dropped quickly. Approximately 700,000 trades were made within the initial 5 minutes. This made the stock jump to nearly 6%. Between 4:25 PM to 4:30 PM, the trades dropped to 350,000, and finally, only 100,000 shares were traded after 5 PM even when the stock price remained at $165.
Things changed the next morning quickly, with more shares traded compared to the previous day. Between 9:30 AM to 9:35 AM, the participants weighed in, and about 2.3 million trades were made. This was approximately three times more than the previous day’s initial high. On this day, the prices dropped to $161. The trades were low for the rest of the day and closed at $157.20. This was just $3 more than the previous day. However, the after-hours trading price from the same stock on the last day was approximately $15 more than this. But, the after-hour gains on the following day vanished completely.
Conclusion
After-hours and pre-market trading offers you an edge over the others in the stock market, but you have to be cautious at all times. Fewer transactions and fewer participants can make this an elite and risker trading turf. So always keep yourself updated when you are doing something unconventional, especially when it comes to trading and investing.
If you are an experienced trader who has a deep understanding of numerous factors that can influence stock prices, you can benefit from premarket trading. It will definitely give you an edge over other traders but is also riskier than trading at conventional hours. This is why despite the advantages, most investors prefer to observe it from afar.
If you are trading before the official trading hours, you will stand in direct competition with professional traders and investors. Therefore, it is better to become an expert at conventional trading and then try your hands at premarket trading.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
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