Pre-market negotiation: what is it and how does it work?

Pre-market trading can be a good way to enter or exit the market, especially for widely followed stocks and funds. With pre-market trading, you can make trades before much of the market is ready to act. Despite this advantage, premarket trading is not without its drawbacks.

Here’s what premarket trading is, how to do it, and what to watch out for.

What is pre-market trading?

Pre-market trading is another way to trade stocks or ETFs, in addition to regular daily hours and after-hours sessions. Stocks on the New York Stock Exchange and Nasdaq can be traded pre-market, but only the largest and most liquid stocks and funds typically trade during this time.

US stock and fund trading generally takes place between 9:30 a.m. and 4:00 p.m. Eastern Time. Anything outside of these hours is considered extended hours, including pre-market trading, which runs from 4 a.m. to 9:30 a.m. EST.

The after-hours session runs from 4:00 p.m. to 8:00 p.m. Eastern Time.

Trading before the market opened was once reserved for wealthier clients, but now many online brokers, including Charles Schwab and Fidelity Investments, allow any client to trade during this window. However, many brokers do not allow clients to trade for the entire pre-market trading period, often limiting them to around two and a half hours before the regular session.

Thus, it is not unusual for online brokers to allow premarket trading to begin at 7am.

How to trade during pre-market hours

Doing a pre-market trade is as easy as doing a trade during regular hours, although there are risks associated with it. Here’s how to set up your premarket transaction to buy and sell stocks and funds:

1. Decide what you want to trade

As you would for a trade during normal hours, you must enter the ticker symbol of the stock or fund, the number of shares you wish to trade and the type of order you wish to place – a short order limit or a market order, for example.

2. Set trade terms and time period

If your broker allows you to set the time period, you can specify when you want the order to be executed, with the following choices:

  • At regular hours. This setting means that the order will only be executed during the regular session, when the market is usually the most liquid.
  • In regular and extended hours. This setting will allow your broker to execute the order, if possible, during the regular session or pre-market sessions or after business hours.
  • Only during extended hours. Your broker may allow you to configure the trade to run only during pre-market or after-hours sessions, or only one of the sessions.

The market is much less liquid during pre- or after-hours trading sessions, so it makes perfect sense to use limit orders. You’ll need to specify a price you’re willing to accept, but it helps you avoid the trade executing at a price that diverges wildly from the security’s recent trading price. Some brokers only allow the use of limit orders in extended sessions.

3. Place the trade

After defining the terms of your trade, you are ready to submit the trade to your broker.

But don’t worry if the trade doesn’t execute immediately, or even if it never does. Relatively few investors participate in trades before or after trading hours, and these times do not have market makers to provide liquidity. For your order to be executed, you will need to find someone willing to trade at your price. The market may simply not be available – at any price.

Pre-market trading risks

Pre-market trading presents certain risks for investors wishing to take advantage of it:

  • Lack of liquidity. The pre-market session is much less liquid than the regular session, for most securities most of the time. You may not be able to negotiate at a price you are willing to accept. And market makers and other liquidity providers will not ensure an orderly market, as they would in normal trading. Only relatively few stocks can be traded, even for large and generally liquid stocks.
  • Inability to execute a transaction. You can place an order, but that does not mean it will be filled. And if no one wants to negotiate your price, you’re out of luck. If you insist on trading at any price, you may end up with a very different execution price than you expected.
  • Potential to misjudge sentiment. You may be looking to exit or enter a position after a significant event, such as a company’s earnings, before the rest of the market reacts. But the lack of liquidity in the pre-market can lead you to believe that a stock will sell during the regular session, when it is actually about to rise. Or vice versa. You may end up buying on what looks like a good earnings report, only for the market to dip. Be careful.

These are the main pre-market trading concerns, and they all basically relate to the lack of liquidity typical of most pre-market securities.

At the end of the line

Pre-market trading allows you to trade outside of regular market hours, but this ability doesn’t mean you should. With a thin and illiquid market, it can be easy to make a trade at the wrong price when you could wait a little longer and get a better price in the more robust regular market.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. Further, investors are cautioned that past performance of investment products does not guarantee future price appreciation.

Comments are closed.