Premarket Stock Trading
In most countries, stock markets open at 9.30 am and close at 4.00 pm on all business days. These are called the trading hours and it is buzzing with activity during these hours. Thousands of investors flock the stock market as soon as the opening bell goes on.
However, trading can also happen at hours other than the normal trading hours. So, you can trade in stocks before the market opens in the morning and after the markets close in the afternoon. These are called the premarket stock trading sessions respectively. Jointly, they are known as extended trading hours. This means, that premarket stock trading occurs before the markets open for the day trading. For NASDAQ and NYSE, premarket stock trading hours are from 8 am to 9.15 am ET.
This time is less crowded with investors but it is considered very high risk. The trading at these hours can give good results because of the volatility and low volume of trading. Brokers and dealers can not trade during these hours and that is why there is less volume.
Electronic trading systems have allowed individual investors to access the sock markets during extended hours but most of them accept only limit orders. Limit order will ensure that your trade is executed at the price you want otherwise your order will not be executed when the markets open.
The stocks can move big time in these hours as news stories, announcements during these times can have a huge impact on the prices of a stock. For a trade to happen smoothly, there need to be buyers and sellers, which are readily available at regular trading hours. Since there is less trading volume at these hours, some of the orders are not executed. Again due to low volume, there can be a huge difference between an ask price and a bid price. Because of the less buying and selling, volatility in stock prices is also very high.
Considering the risks involved, most experts and professionals advise not to trade during these hours and if done at all, it should only be for limit orders. Limit orders are the orders which are executed at the price which is chosen by the trader where as market orders are executed at the current market price which can be unreasonable at these hours.
Mostly high net worth individuals or institutional investors trade during these hours as they have more resources and information about the market than an individual investor. These investors, who trade in extended hours, do so, because they want to beat the competition.
Some brokers facilitate extended hours trading but demand a higher brokerage. Volatility in prices, lack of liquidity, less information and other factors is the reason why they charge higher.
Though the prices are some times very attractive at these hours, you need some expertise to trade at extended hours. You should evaluate all the risks and benefits involved before you decide to trade. One thing is for sure, an extended hour trading is not a place for new entrants in the market.