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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Pre-Market Trading

What it is:

Pre-market trading is the trading that occurs on electronic market exchanges before regular stock market trading hours begin.

How it works (Example):

In the U.S., pre-market trading occurs between 8:00 a.m. and 9:30 a.m. Eastern Standard Time (EST), and after-market trading typically occurs between 4:00 p.m. and 6:30 p.m. EST. After-hours trading is usually abbreviated with the acronym AH.

Until recently, pre-market trading volume has been relatively low -- typically the domain of big institutional investors who had the confidence to engage in unorthodox trading methods. However, the volume of extended trading has grown in recent years as retail investors become more comfortable with the idea of trading over an electronic communication network(ECN), which is how extended trading takes place.

ECNs connect buyers and sellers over a digital network, eliminating the need for an intermediary such as a broker or investment bank. The Nasdaq market is an example of an ECN. Rather than a physical location such as the New York Stock Exchange, the Nasdaq is a network of securities traders who engage and trade directly with one another.

Why it Matters:

Pre-market trading allows investors to act quickly to major events that can serve a catalyst for market changes, such as sudden corporate misfortune, political turmoil overseas, late-breaking news, etc.

However, pre-market trading can also be subject to the whims and fears of less-sophisticated investors. Consequently, veteran pros on Wall Street sometimes refer to pre-market trading as "amateur hour."

[InvestingAnswers Feature: 5 Signs Your Emotions Are Taking Control of Your Investing.]

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