What is premarket trading and how does it work?

What is premarket trading?

Like its name implies, premarket trading is trading that happens before the market typically opens. The usual hours for premarket trading in the U.S. are 4 a.m. to 9:30 a.m. EST, when the market opens for normal trading hours.

During premarket trading, you can buy and sell stocks just as you can during the normal trading day. However, there are some distinct differences between normal trading and regular trading.

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How does premarket trading work?

Premarket trading works much like trading during normal market hours, but with far fewer people participating. This adds some unique aspects to pre-market trading.

One is low liquidity. During the day, millions of shares change hands so it’s typically very easy to find someone who wants to buy or sell a specific stock. This high level of liquidity means that the difference between the lowest selling price and the highest buying price for a stock (called the bid-ask spread) is typically low.

During premarket trading, there are far fewer people placing orders. The bid-ask spread can be quite large, or you might have trouble finding anyone willing to buy or sell shares in a specific company.

This low liquidity can also make stock prices more volatile during pre-market hours. Prices can swing up and down wildly, making it hard to assess the fair value of a share.

Who can trade premarket and how to get started?

In the past, premarket trading was restricted to very wealthy and institutional investors. These days, almost anyone with a smartphone or computer can get involved with pre-market trading if they have an account with a brokerage that allows it.

If you want to try your hand at premarket trading, the first thing you’ll need to do is open a brokerage account. Make sure the brokerage you’re using allows premarket trading. Most major brokers, like Fidelity and TD Ameritrade allow pre-market trading.

Once you’ve opened an account, you’ll need to deposit some money so you can start placing orders. Depending on the broker, you may also have to meet some other requirements or fill out forms to be allowed to trade outside of normal hours.

Once your account is open and funded, you’re ready to get started.

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What happens if I submit an order and no one wants to buy or sell that stock?

During normal trading hours, it’s very unusual for there to be no one willing to buy or sell a stock that you want to trade. However, during pre-market trading, there are fewer investors active in the market, so you might submit an order only to find that there’s no one willing to be on the other end of that transaction.

If that happens, your order will sit open until someone submits a corresponding order. So, if you submit a buy order, you need to wait for someone willing to sell and vice versa.

If by the time the market opens, no one submits an order that lets you complete the transaction, most brokerages will cancel your order. Many brokers also let you set custom rules for canceling orders if they’re not fulfilled within a certain period.

Can you trade after the market closes?

Just as there is premarket trading, there's after-hours or postmarket trading. Together, premarket and postmarket trading make up extended trading hours. Once the market closes at 4, after-hours trading commences. It usually lasts until 8 p.m.

Just like premarket trading, after-hours trading typically includes fewer traders so similar advantages and disadvantages apply.

Advantages of premarket trading

There are advantages to premarket trading that may make it appealing to some investors.

One advantage is the opportunity to move on news before other traders. News stories about new products and events that could affect stock prices don’t wait for business hours. They can come at any time of the day or night.

If you see a story that could impact a share’s price, making a trade during premarket hours could allow you to seize an opportunity that would be lost if you had to wait for normal trading hours.

Another advantage is that premarket trading tends to have fewer participants than trading during business hours. If you’re lucky, you might be able to get a good deal from someone who is very motivated to make a trade.

Premarket trading is also simply convenient. If placing orders earlier in the day, before the market opens, is easier for you than trading between 9:30 and 4, then having that option can make your life a bit easier.

Risks of premarket trading

Premarket trading can also be risky, so it’s important to understand the risks before you start.

One major risk is that the lower number of participants increases both the volatility and the bid-ask spread for stocks. It can be more difficult to assess a fair value for shares because of this volatility.

The greater bid-ask spread also means that you might submit an order and have it fulfilled at a very different price than expected. This makes it very important to use limit orders.

With a market order, your buy or sell order will fulfill at the best available price, whatever that may be. If you use a limit order, you can set a minimum price to sell at or a maximum price to buy at, meaning you won’t accidentally sell for far less than you want to or buy at a much higher price than desired. For example, if you set a sell-limit order with a minimum price of $50, your order will only go through if someone is looking to buy those shares for $50 or more.

Another risk of pre-market trading is that, despite its growing accessibility, it remains most popular with experienced and professional investors. Competing with highly experienced investors may make it more difficult for you to turn a profit.

More: How does the stock market work?

The bottom line

Premarket trading offers investors the opportunity to buy and sell stocks before the market opens. This can help you move on news before other investors get the opportunity to do so, but premarket trading isn’t without risks. Low liquidity and large bid-ask spreads make it important that you trade carefully and know what you’re doing before you place a buy or sell order.