As its name implies, premarket trading allows investors to buy stocks before the stock exchange officially opens. While you access the premarket from your online broker, just as you would for a regular-hours trade on the exchange, premarket trading happens via electronic communication networks, or ECNs. ECNs connect traders electronically and match the marketâ€™s best bid and ask quotes. When thereâ€™s a match, the trade executes. If thereâ€™s no match, or there are no buyers or sellers, a trade wonâ€™t happen. So a trade may take a while to execute, if it does at all.
Premarket trading can begin as early as 4 a.m. ET for stocks on either the Nasdaq or New York Stock Exchange. However, your broker may restrict its premarket hours or not offer this service at all, so youâ€™ll have to check to see when and if you can trade.
Here are the premarket hours offered by five major brokers:
Not every broker offers premarket trading, but the largest brokers typically do. Brokers often allow you to input your premarket orders the night before, once the after-hours market closes.
In the premarket, traders donâ€™t have the full range of order types they have in the regular market. For example, youâ€™ll still be able to buy, sell and sell short, but many brokers donâ€™t permit market orders and instead require that you place a limit order for any trade. Other special order types typically are not accepted. Ultimately, these restrictions help prevent traders from placing a poor trade that craters or skyrockets the stock, ensuring a more orderly and stable market.
Besides premarket trading, if investors are looking to invest outside regular market hours, they also can place orders in the after-hours market or extended-hours market. The after-hours market can start as early as 4 p.m. ET and can run as late as 8 p.m. ET on regular trading days. It has the same benefits and drawbacks of the premarket, which are detailed below.
Investors can trade in the premarket, but what are the advantages of doing so? There are at least three reasons investors might want to use the premarket to trade:
But itâ€™s not just news related to the company. Macroeconomic reports and data often come out before the bell, and news from international markets â€” how they traded and what theyâ€™re worried about, for example â€” is coming in all the time too.
Importantly, the price of futures contracts on an index such as the S&P 500 can diverge from the calculation of the indexâ€™s fair value. This divergence provides an opportunity for nimble traders to arbitrage the difference and make a profit.
While those are some solid benefits, premarket trading does have downsides, though savvy investors can sidestep these issues somewhat. Potential drawbacks include the following:
Premarket trading offers some valuable benefits to traders, though with some clear but (somewhat) manageable drawbacks. Savvy investors who know what theyâ€™re doing and have a clear idea of a stockâ€™s value may be able to take advantage of the premarketâ€™s lower liquidity and find a deal.
However, less experienced investors may be better served to wait until regular hours in order to avoid the risks associated with extended-hours trading. (If youâ€™re a beginner, youâ€™ll want to have a look at how to invest in stocks before you dig into trading.)