Premarket Stock Trading Pros and Cons

Traders are able to buy and purchase stock within specific trading hours. A trading schedule can be changed depending on holidays, day-offs, and other factors. However, it is possible to complete transactions within an officially provided timeframe. At the same time, some experts seek extra opportunities to grab the winning chance and apply premarket stock trading.

Premarket stock trading is a concept that lets you actually start trading before the opening market hours. Technically, you have a chance to buy and sell stocks at premarket trading hours with a chance to make decisions based on off-hour events or news. At the same time, the strategy comes with specific risks due to a limited number of market participants and extremely volatile prices.

In this article, we will discuss the benefits and downsides of premarket stock trading.

What Is Premarket Trading?

Different exchanges work as per a preset schedule. For example, when you trade US-based assets, you will have to follow the NYSE schedule between 9:30 a.m. to 4 p.m. At the same time, additional platforms and electronic exchanges make it possible for participants to enter the market earlier. Technically, they establish additional premarket stock trading hours that can also be used to purchase and sell assets.

Premarket Stock Trading Hours

Although the concept of premarket stock trading is relatively new (it was launched in 1991), it has already introduced some long-outrunning and time-tested ECNs. Electronic communication networks (ECN) exist only within the digital environment and do not have land-based or physical sites. Users can connect to the digital network and place orders. NYSE Arca is one of the most popular and longest-running ECNs. I

Premarket stock trading hours depend on the electronic platform you use. Some ECNs offer early trading that starts at 4 a.m. EST. However, the majority of digital services let traders enter the market from 8 a.m. to 9:30 a.m. when the official trading hours come into force.  

Furthermore, traders can not only use early hours but also buy and sell stocks when the official markets are closed. The concept is known as the after-hour trading strategy. It usually takes place from 4 p.m. to 6:30 p.m. At the same time, it has no time limits and takes place until the next morning.

Why Investors Use Premarket Stock Trading

Who can benefit from premarket stock trading hours? Actually, anyone. It does not have specific restrictions. Any trader can enter ECN and start trading before the official market opening hours. The main question is why you may need it.

Some market participants use the concept of the trend direction as well as where the underlying asset is heading. Others try to make the most from the off-hour breaking news or events, as they can define the price and trend direction for the rest of the day. For example, a company can make an important press release or market announcement before the exchange opens. The news may result in a stock price repaid increase or a drastic fall.

Risks Associated with Premarket Stock Trading

It appears that a few traders use the concept. This is probably due to some risks involved. In reality, the stock price is more volatile in premarket trading if compared to usual trading hours. This fact may result in bigger losses. Besides, investors can trade only a limited number of assets, which results in moderate trading that can lead to significant losses when the price changes.

The main risk is that sometimes premarket stock trading hours do not reflect the real stock price that will be publicly announced during traditional hours. This fact makes the entire concept quite deceptive. Even if the stock price goes up during the premarket trading, it may unexpectedly drop during regular hours.

The Bottom Line

Sophisticated and experienced investors can benefit from premarket trading. At the same time, beginners should always keep in mind all risks associated with the hit strategy. Actually, anyone can use ECN to buy or sell assets earlier than regular hours. However, the losses can be significant. So, if you are ready to compete with proven experts, you may give it a shot. If not, you’d better stick to traditional trading sessions. 

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.