When you buy stocks before hours, you engage in pre-market trading. As the name implies, pre-market trading occurs before the regular trading session of 9:30 a.m. to 4:00 p.m., Eastern time, Monday through Friday, on the major U.S. stock exchanges. Pre-market trading runs between 4:00 a.m. and 9:30 a.m. While the logistics of buying stock in the pre-market differ little from doing so during the normal trading day, you need to be aware of potential pitfalls before taking the leap.
1. Open a brokerage account. Whether you set one up online or open an account over the phone or in person at a brick-and-mortar location, ask the firms you look into if they offer pre-market trading. Not all do.
2. Study your brokerage's online platform if you intend to make pre-market stock buys on your own and online. Generally, you save money on commission charges by making your own trades as opposed to executing them with a live broker over the telephone or via an automated telephone system. Knowing the basic ins and outs of the platform (e.g., where to enter number of shares, location of key commands, which buttons to push) prior to making a trade could prove crucial, particularly if you have to make quick decisions on fast-moving stocks.
3. Focus on the bid/ask spread when placing a pre-market stock buy. The ask represents the price you'll pay to buy shares, while the bid represents the best price being offered to sellers of shares. As the NASDAQ website explains, due to lower trading volumes in the pre-market, bid/ask spreads are often wider than they are during normal trading hours. This means your stock buy runs a greater risk of executing at an unfavorable price.
4. Use limit orders. When you place a stock buy in the pre-market, be sure to set a limit on the price you are willing to pay for a stock. This will help ensure that you do not buy a stock at an unfavorable price due to low volume or a wide bid/ask spread.
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