The United States equities market officially starts at 9:30 a.m. Eastern Standard Time (EST) to 4:00 p.m. EST every Monday through Friday. However, the stock market is also open for business before the regular market trading hours. This particular time period is known as premarket trading or premarket sessions. This begs the questions, “What is premarket trading, and when does premarket trading start?”
What is Premarket Trading?
Premarket trading has progressively risen in popularity since the 1980s. It allows investors to trade assets before the stock market officially opens at 9:30 a.m. EST for a specified amount of time every Monday through Friday.
These premarket trades are technically considered an order because the financial markets are closed. As a result, investors and brokers place a limit order to dictate the highest and lowest price that they will accept to buy or sell a stock.
You can execute limit orders through electronic communication networks or ECNs or dark pools.
Electronic Communication Network (ECN)
The U.S. Securities and Exchange Commission (SEC) requires ECNs to register as broker-dealers and members of the Financial Industry Regulatory Authority (FINRA). An ECN is a computerized system that connects major brokerage firms and individual traders, and automatically matches buy and sell orders. They charge a fee for each transaction and eliminate the role of a middleman or third party to execute orders. In general, ECNs help avoid the wider spreads and charges lower commissions and fees than traditional brokers.
One popular ECN is the Archipelago (ARCA), which united with the New York Stock Exchange (NYSE) in 2006 to create the NYSE Arca Exchange. Others include Bloomberg Trade Book (BTRD) and Island (ISLD). Market makers cannot execute orders until the opening bell at 9:30 a.m. EST.
A dark pool is a network of privately held trading forums, markets or exchanges for trading securities. It is not accessible by the investing public. Dark pools receive their name because of their lack of transparency. It serves to trade a significant number of shares confidentially and outside the purview of the general investing public. Since there is no order book visible to the public, these institutional investors avoid obtaining unfavorable prices for their trades.
When Does Premarket Trading Start?
Premarket trading is between 4 a.m. and 9:30 a.m., after which the regular market official opens. However, the exact time that you can buy or sell stocks in the premarket trading session depends on your broker.
For example, Scottrade grants its traders extended hours between 6 a.m. EST to 9:28 a.m. EST. On the other hand, TD Ameritrade only permits a 75-minute pre-trading session between 8 a.m. EST and 9:15 a.m. EST. NASDAQ allows premarket trading as early as 4 a.m. EST right up until the regular market opens. Unfortunately, some brokerage firms may not offer any premarket trading at all.
Be sure to check if your brokerage charges additional fees for these extended hours of trading.
How to Prepare for Premarket Trading
Many investors engage in premarket trading because it gives them a head start on the competition. With the extra preparation time, they can react quickly to news releases.
Reacting to Company News Releases and Announcements
Most companies and corporations make significant and market sensitive news announcements before or after regular market trading hours. This strategic timing is to avoid any extreme reactions that may misrepresent the actual value of the stock, resulting in huge losses.
If the announcement, such as a company’s last-quarter earnings, is released when the market is not yet open, investors have more time to digest the information and then take the appropriate action when the market opens. This also gives the company more time to clarify and address the issue, thus resulting in a higher chance of its stock closing at fair value during regular trading hours.
If you trade during these news announcements and releases, you would be able to anticipate the market’s movements. Unfortunately, once the market opens, the share prices would have already changed, making it too late to make a trade.
Unexpected News Events
Aside from scheduled news events, such as quarterly earnings that are released in January, April, July, and October like clockwork, the stock markets are also highly impacted by global news events. These news events may include geopolitical developments or natural disasters worldwide.
The most common example may be if there is a major military dispute or war in oil-producing countries. These developments may severely impact oil prices. Premarket traders can then have a head start to play on related stocks before the market opens for other investors.
Many economic indicators, or key statistics that may indicate the general trend of an economy, are often released at 8:30 a.m., or one hour before the markets open. If you are trading during this time, you have ample time to react to this data and how it will affect the trading day.
Leading indicators may include a company’s big contracts or share price. Another indicator is the coincident indicator, such as retail sales and employment rates. A crucial third type of economic indicator is a lagging indicator which might include interest rates or the consumer price index.
These economic indicators, especially leading indicators, are considered fundamental stock triggers and may significantly impact an asset’s price action during premarket hours as well as when the market opens. For example, the Employment Situation Summary or jobs report by the U.S. Bureau of Labor Statistics (BLS) is released on the first Friday of every month at 8:30 a.m. This report can trigger a series of subsequent reactions, such as impacting retailer stocks.
Watch for Lower Liquidity, Wider Spreads, and Higher Volatility
Premarket trading comes with limitations and risks.
With premarket trading, these may be less volume and lower liquidity. As a result, you may have difficulty executing some of your trades, such as selling your stocks with fewer people trading. Therefore, you may consider avoiding smaller non-blue-chip companies. In other words, you may have a tough time closing your position in corporations that have not been operating for years and do not have a market capitalization in the billions during premarket trading.
A spread is the difference between the buying price and the selling price that a trader is asking. With approximately only 25% of actual trading volume and limited liquidity in the extended hours of trading, cause bid-ask spreads to be wider than usual.
For example, a stock may have a reasonable spread of less than .25% during the official trading day. However, during premarket hours, it may not have spread of over .75%. The reason for the more extensive spread is because of the smaller number of traders that have not agreed on a fair price. As a result, the gap may prove to be a challenge for you to have your order executed or you may receive an unfavorable price, with potential losses of 5% or more from a wide spread.
Lower volume and after-hours traders that are predominantly professionals with large institutions may result in higher price volatility and greater price fluctuations than normal. The unpredictable price movement may make it trickier to know when to buy or sell an asset.
Risk of Uncertain Prices
One significant risk of trading during the market’s extended hours is that a security’s price may not accurately reflect the price at the end of regular trading hours or during opening the next morning. For example, a stock’s price may rise during after-hours trading, but immediately reverse when trading begins again. This uncertainty is difficult to predict and comes with inherent risks that should be included in your money management strategy. Nevertheless, premarket trends are often good indicators of potential market movements, although they may not come with any certainty.
What is Premarket Trading Delay?
Trading outside of normal market hours may experience abnormal trading delays or even complete failure to execute a trade. This issue typically lies between specific brokerages and the ECN. Any computer hiccups or glitches can delay your trade or accidentally cancel your trade completely.
Premarket trading is best for experienced traders that are comfortable with technical analysis. With proper technical signals, a trader may be able to place a trade to get the first mover’s advantage before the market officially opens.
Additionally, as premarket traders need to be extremely diligent and aware of company announcements and global news, it is imperative that they know how to adjust their trading plan to react accordingly.
Unless there is a good reason to trade during premarket hours, most investors may only observe data during this time. For example, some traders use premarket trading hours to research and plan their trading strategy for the day. These investors typically wait until 9:45 a.m. EST to allow three 5-minute candles to confirm their analysis before making a trade. By monitoring news releases, technical indicators, and price action, you can carefully curate your securities watchlist and be more than ready to execute trades when the trading day officially opens at 9:30 a.m.
For more tips on how to learn to trade, subscribe to the Money Calendar Alert. This program can teach you how to profit from the stock market during regular trading hours as well as during the pre- and post-market sessions.