Pre-market trading can be a good way to get into the market or out of it, particularly for widely followed stocks and funds. With pre-market trading, you can place trades before much of the market is ready to act. Despite this advantage, pre-market trading is not without some drawbacks.

Here’s what pre-market trading is, how to do it and what to watch out for.

What is pre-market trading?

Pre-market trading is another way that you can trade stocks or ETFs, in addition to the regular daily hours and the after-hours sessions. Securities on the New York Stock Exchange and Nasdaq are available to trade in the pre-market — but only the largest, most liquid stocks and funds usually trade during this period.

Trading in stocks and funds in the U.S. usually takes place during the hours of 9:30 a.m. to 4 p.m. Eastern time. Anything outside those times is considered extended hours, including pre-market trading, which runs from 4 a.m. to 9:30 a.m. Eastern time.

The after-hours session runs from 4 p.m. to 8 p.m. Eastern time.

Trading before the market opened used to be the province of wealthier clients, but now many online brokers, including Charles Schwab and Fidelity Investments, allow any client to trade during that window. However, many brokers do not allow customers to trade during the full pre-market trading period, often restricting them to the two and a half hours or so before the regular session.

So, it’s not unusual for online brokers to allow pre-market trading to actually begin at 7 a.m.

How to make trades during pre-market hours

Making a pre-market trade is as easy as making a trade during regular hours, though it does present risks. Here’s how to set up your pre-market trade for buying and selling stocks and funds:

1. Decide what you want to trade

As you would for a trade during regular hours, you must input the stock or fund’s ticker symbol, the number of shares you want to trade, and the type of order you want to make — a limit order or market order, for example.

2. Set any trade conditions and time period

If your broker allows you to set the time period, you can specify when you want the order to execute, with the following choices:

  • In regular hours. This setting means the order will execute only during the regular session, when the market is generally most liquid.
  • In regular and extended hours. This setting will have your broker fill the order, if possible, during the regular session or the pre-market or after-hours sessions.
  • Only in extended hours. Your broker may allow you to set the trade to execute only during the pre-market or after-hours sessions, or only one of the sessions.

The market is much less liquid during the pre-market or after-hours trading sessions, so it makes a lot of sense to use limit orders. You’ll need to specify a price you’re willing to accept, but that helps you avoid the trade executing at a price that diverges wildly from the recent trading price of the security. Some brokers only allow for the use of limit orders in the extended sessions.

3. Place the trade

After you set up the conditions for your trade, you’re ready to submit the trade to your broker.

But don’t become alarmed if the trade doesn’t execute immediately, or even if it never does. Relatively few investors participate in pre-market or after-hours trading, and these periods don’t have market makers to ensure liquidity. For your order to execute, you’ll need to find someone who’s willing to do the trade at your price. The market may just not be available – at any price.

Risks of pre-market trading

Pre-market trading presents some risks to investors who want to avail themselves of it:

  • Lack of liquidity. The pre-market session is much less liquid than the regular session, for most securities much of the time. You may not be able to trade at a price you’re willing to accept. And market makers and other liquidity providers won’t ensure an orderly market, as they would during normal trading. Only relatively few shares may trade, even for the large and typically liquid stocks.
  • Inability to execute a trade. You can put an order in, but that doesn’t mean it will fill. And if no one wants to trade at your price, you’re out of luck. If you insist on trading at any price, you may end up with a much different execution price than you had otherwise intended.
  • Potential to misjudge sentiment. You might be looking to get out of or into a position after a big news event, such as a company’s earnings, before the rest of the market reacts. But the lack of liquidity in the pre-market may lead you to believe that a stock will sell off during the regular session, when it’s actually about to go up. Or vice versa. You can end up buying on what looks like a good earnings report, only for the market to plunge. Be careful.

Those are the biggest concerns with trading the pre-market, and they all essentially concern the lack of liquidity that’s typical of most securities in the pre-market.

Bottom line

Pre-market trading lets you place trades outside the typical market hours, but that ability doesn’t mean you should do so. With a thin and illiquid market, it can be easy to make a trade at a bad price when you could wait a bit longer and get a better price in the more robust regular market.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.