How Pre-Market Stock Trading Works

Background

Originally, extended-hours trading was introduced for institutions to trade large blocks of shares at agreed prices. Stock trading is a continuous auction market where prices are set by an agreement between sellers and buyers. When an institution wants to sell a large block of shares, it would rather call other institutions to find a single buyer than break up the block into multiple small pieces to try to sell it to multiple small investors. As long as the seller and the buyer agree on the price, the transaction does not have to take place during regular trading hours. It can be done pre-market or after-hours--as long as it is properly recorded and reported.

With the proliferation of electronic trading, the right to trade during extended hours was extended to anyone with access to pre-market or after-hours trading. If your broker platform provides that access, you can trade pre-market or after-hours.

Pre-market trading takes place Monday through Friday from 8 a.m. to 9.30 a.m. Eastern Time. On certain holidays, pre-market trading may be reduced or canceled.

Pre-market trading can only take place at prices agreed on by the seller and the buyer. Only limited buy and sell orders are accepted. You must specify the price at which you are willing to buy (or sell) when placing an order.

During regular trading hours, New York Stock Exchange (NYSE) specialists are required to maintain an orderly market in the stocks assigned to them. Although not obligated to do so, NASDAQ market makers essentially do the same. That means that when you place a market order, it usually is executed almost instantaneously, and a specialist or a market maker, not another retail investor, may take the other side of the transaction. There is no such requirement in pre-market trading. Your limit order may not be executed at all if there are no takers.

Traders are constantly striving to beat other traders in response to incoming news. If a company releases important news that can affect the stock price before the market opens, traders often try to buy or sell in reaction to the news in pre-market, ahead of the regular crowd.