The stock market is among the most active in the developed world. In the United States, the volume of stocks traded every day is worth trillions of dollars.
However, the biggest challenge for stocks is that trading hours are usually limited.
For example, in the United States, the New York Stock Exchange (NYSE) and Nasdaq are open from 9:30 am to 4:00 pm. The same is true for other exchanges around the world.
To solve the problem, the main exchanges in the US have started extended hours trading. These hours are also known as premarket and after-hours trading.
What is Premarket Trading?
If you watch financial media frequently, you will realize the commentators talk about how stocks are trading even before the exchanges open.
You also here them talk about how the indices are trading before the market opens. When you hear them talking about these, they are basically talking about premarket trading.
Similarly, stocks continue to trade for a few hours after the exchanges are closed. This is known as afterhours trading.
Premarket trading hours
Why American Bourses extended Trading Hours
American bourses started to embrace the concept of extended hours in the 1990s.
That is because these exchanges were facing increasing competition from foreign bourses, especially those in Hong Kong and London. Most of these exchanges tend to have longer trading hours.
U.S Pre Market Hours
Therefore, the NYSE and Nasdaq decided to allow premarket trading, which starts at 4:30am to 9:30, when the market opens.
At the same time, they decided to offer afterhours trading after the markets close. Still, many brokers have their execution details for afterhours trading.
How does Premarket trading Works? Differences with standard trading
Premarket trading is different from the standard trading in several ways.
Orders & Limit Orders
First, in standard trading, orders are placed instantly at the market prices. This is not the case with premarket and afterhours trading. In the two, only limit orders are placed. A limit order is an on order in which you direct the broker to open a trade in future.
For example, a broker like Schwab processes premarket orders between 07:00 am and 9:25 eastern time. A broker like Interactive Brokers allows premarket trading by IBKR Pro from 04:00 EST until the market opens. For IBKR lite customers, the trading starts at 07:00 am.
Number of Shares
Another difference between the two is on the number of shares you can buy during the period. In the standard market, you can buy any number of shares you want. However, in the premarket trading, some brokers have other requirements.
For example, Schwab only allows a maximum of 25k shares to be traded during the extended hours.
In addition, volume is an important aspect for any trader. An important characteristic of afterhours trading is that the volume is usually limited because the number of participants is usually a bit small.
Therefore, as a trader, you should be concerned because of the limited volume.
Key Premarket Movers
There are several reasons why shares of a company moves sharply during the premarket hours.
First, the stock can be relatively volatile if the firm releases its earnings.
For example, if the company reports better-than-expected results, the share price can move relatively higher and vice versa.
Second, the shares can be volatile if the company reports a major news.
For example, a few weeks ago, Moderna share price rose sharply after the company announced that it was testing a covid-19 treatment.
Third, stocks can move because of macro events. For example, recently, shares of energy companies declined in premarket trading after the price of crude oil went negative.
The premarket session is an important period for you to look at. In most times, you should take advantage of these moves to open trades and benefit from movements.
Still, you need to understand the risks involved because of low volume and that several brokers charge more for premarket trades.
External Useful Resources
- Pre-Market and After-Hours Trading Activities – Investopedia