Pre-market trading takes place before the market opens at 9 a.m. Eastern Time. Traders use pre-market trading to react to the news reported while the market was closed. Pre-market trading may provide you with an immediate price advantage ahead of regular trading, but it is also fraught with risks and limitations that can lead to losses.
Watch Before You Act
Most online brokers provide access to pre-market trading. Talk to your broker or explore your trading platform, and watch the action to familiarize yourself with the procedure before trading.
Only limit orders are accepted in pre-market trading. Prices from other traders are quoted as bid and ask: Bid is the highest price at which you can sell; ask is the lowest price at which you can buy. For example, if XYZ is quoted pre-market as $27.35 bid and $27.52 ask, the lowest price at which you can buy is $27.52.
Enter Your Order
Decide how many shares you want to buy and how much you are willing to pay. The current ask is a good indication, although prices may be moving fast; watch the reported trades to determine the trend. Enter your order -- the number of shares you want to buy and the limit price. You may set the limit at the current ask of $27.52 or lower if you think you can get a better price, but neither way guarantees that your order will be executed, as the price may move away from you faster than you can keyboard.
Order Execution and Adjusting the Price
If 300 shares of XYZ are available at $27.52, your order will be executed right away and reported back to you through your broker. If there are fewer than 300 shares available at that price, your order might be partially executed -- that is, you will get some shares, but not all. If there are other orders at that price ahead of you or in a fast-moving market, the price might move away from you, in which case you will have to adjust your limit price upward if you still want the shares. You may end up chasing the stock up or setting the limit above the current bid to make sure you catch some shares.
Beware of Risks
Because of limited volume and participation, pre-market trading is often subject to wide price swings. Experienced traders take advantage of novices’ emotional trading by setting ask prices high and bid prices low. Be sure there's a good reason why you can’t wait half an hour to buy your stock in the regular market when it opens.
Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.