The stock market is a highly regulated and standardized market that has specified opening and closing periods daily. However, certain professionals and institutions still find ways to buy and sell securities outside the official hours despite the regimented restrictions. Investors may do this for highly strategic reasons or simplistic reasons such as convenience.
The trading of stock outside of the official trading hours stated by the stock exchange is called extended-hours trading. And it can be of two main types: after-hours trading and pre-market Hours trading.
What is Pre-Market Hours Trading?
Pre-market trading refers to stock transactions that are made in the periods before the opening bell of the next trading day.
While After-market trading refers to trade that occurs right after the standard market has closed,
The leading exchanges in Canada, Toronto Stock Exchange (TSX) and CSE, hold standard trading sessions that begin at 9:30 am and end at 4:00 pm. Any trade that occurs before the 9:30 AM mark is deemed Pre-market trading.
However, since the official trading floor is not yet open, Pre-market hours trading can only be carried out through a unique market mechanism know as Electronic Communication Networks (ECNs).
ECN’s enable buyers and sellers of stocks to trade among themselves without being on the trading floor physically.
Who are the Participants of Pre-Hours Trading?
Pre-hours trading was previously reserved for large institutions and wealthy investors who were uncomfortable using conventional trading methods. Trading volume was relatively low. Large investors dominated the after-hours market until the 1990s when ECNs were introduced.
However, when ECNs were introduced in the 1990s, it opened doors for regular individual investors to participate in extended-hours trading. As a result, the trading volume started increasing as retail investors became familiar with the ECNs platforms.
Which Platforms Allow Pre-Market Hours Trading in Canada?
Not all trading platforms allow investors to trade outside official market hours. A few sophisticated stock trading platforms do allow it. Some of the brokerage firms that facilitate pre-hours trading are Fidelity, Vanguard, TD Ameritrade, and Charles Schwab.
The brokers may charge an additional fee for the ECN service. To participate in pre-hours trading, you have to inform the brokerage platform, usually with a written agreement, to indicate that you are well-aware of the risks involved.
How to Find the Right Pre-Market Hours Stocks
Pre-Hours trading provides investors ample opportunity to respond to major events and new information ahead of the next trading period. Such events may include late-night breaking news, company statement releases, or political unrest.
Pre-market trading allows investors to react to the new information as they occur, rather than waiting until the next day when the entire market has had time to respond.
In Pre-market trading, many experts’ usual routine involves selecting stocks with very low volume or that are likely to be affected by material news. This presents an opportunity to make significant profits before the market is able to react in official hours.
Benefits of Pre- Hours Trading
Pre-market hours trading often provides increased levels of convenience that may not be present during the regular trading sessions. Pre-market hours trading is characterized by a significantly low volume of trade as the market only involves a few large corporations, wealthy investors, and a handful of retail traders. These low levels of activity provide some added convenience that may not be present during standard trading sessions.
2. Pricing opportunities
Volatile stock prices characterize Pre-Market Hours trading. Although it has quite a negative ring, it presents an excellent opportunity for traders to benefit from the wild movements in prices.
For example, when a stock’s value is affected by a material news event, a trader can take immediate action to benefit from it by placing a trade before the next day’s trading session begins. This can be a major advantage if the stock’s price moves to an advantageous level during a normal trading day.
3. Fresh information
Extended hours sessions provide investors with opportunities to trade on the back of new information released before the opening of the normal trading day. The information may have a short-lived effect and only favors investors who react quickly before the next trading session begins.
Risks Involved in Pre-Market Hours Trading
While pre-market trading poses a significant opportunity for traders to make a quick buck, several risk factors are also associated with it.
1. Lack of liquidity
Trades conducted during extended trading hours are of very low volume. In literal terms, it means that there is often greater demand than the supply of stocks for investors that want to trade. This can pose serious risks as investors are not able to buy, sell or switch trading positions in real-time.
2. High competition
Retail investors may be at a disadvantage when trading in pre-market hours as they are forced to compete against large institutional investors who have large amounts of capital at their disposal. Furthermore, these large corporations may hire expert traders who are more skilled in executing trades than most regular individual investors.
3. High volatility
Compared to regular trading sessions, off-peak hours trading is characterized by high volatility in the prices of stock. This can lead to huge losses within a short time if the market moves against your trade position. The lack of liquidity in off-peak hours may also make it difficult for you to make counter-trade early enough to cut your losses.
4. Impulse Trades
To make significant profits in pre-market hours, investors have to react quickly to material information. This leaves very little time to ascertain the veracity of these pieces of information. Sometimes such information may turn out to be rumors or outright lies. In some cases, a piece of additional information may surface to provide further clarification. If an investor takes a trade position off a piece of incomplete or false information, he stands a risk of catastrophic losses.
By nature, Pre-market trades leave even the most skilled investors vulnerable to information-based scams and schemes such as pump and dump or poop and scoop scams.
Although the opportunity to make a killing may be quite enticing, you should stick to trading in the regular hours if you are not skilled enough.
If you are new to stock trading, the regular market sessions are perfect for you to learn and improve your skills gradually. Speak to your broker to get as much information as required before taking a trade position.