The opening bell ceremony is a ritual most people are now familiar with. With the demise of almost all physical trading floors, the event is a symbolic way to mark the start of each new trading day, and acts as a focus point for companies publicizing new IPOs, or for the breaking of significant market news.
Can You Buy Stocks Before The Opening Bell?
Just because stock exchanges operate regular trading sessions, it doesn’t mean you can’t still buy and sell securities outside of these predetermined times.
In fact, pre-market trading can offer a range of different benefits to investors than those typically available during normal hours. This kind of trading takes place anytime from the early hours of the morning onward, but usually occurs between 8 a.m. and 9:30 a.m. EST. Some direct access brokers in the United States will allow you begin your pre-market trading as early as 4 a.m.
But it wasn’t until June 1991 that trading outside of regulation hours began. Competition from private and global exchanges – like those in London and Japan – forced the New York Stock Exchange’s hand, and after-hours trading was introduced, extending the normal trading day by just one hour.
As time went on – and the stock market became almost entirely computerized – further extensions to the regular trading day were made, eventually leading to the status quo we have today.
How To Buy Stocks Before The Opening Bell
Investors can trade stocks and other securities before the market opens using a variety of electronic and alternative trading exchanges.
Some of the most popular electronic exchanges are known as alternative trading systems (ATSs) – which are non-exchange trading venues that include dark pools and call markets – and electronic communication networks (ECNs), which are a kind of ATS offered by brokerage firms serving the retail investor space.
These trading exchanges facilitate orders by matching buyers and sellers looking to trade the same asset. Some popular ECNs available are the NYSE Arca, Instinet, and SelectNet.
Reasons To Buy Stocks Before The Opening Bell
Despite the fact that you can only make limited orders with an ECN, there are still compelling reasons why you might still want to trade outside of normal trading hours:
React quickly to emerging events
Market-sensitive news can break at any time, and, given the typical exchange trading hours last little more than a quarter of the day, there’s a good chance that significant price catalysts happen when most traders are asleep.
What this means for investors at work in the pre-market interlude is that they can take advantageous market positions before the rest of Wall Street wakes up and the normal trading session begins.
Events of a geopolitical nature, corporate earnings reports, or a rating downgrade in another jurisdiction could all have an impact on a share’s value in pre-market trading.
However, you should beware – just because something looks bad, it doesn’t always follow that the market reaction will be the same. For instance, a company might miss its revenue target in its quarterly filing, but other details could outweigh the negative, causing the firm’s share to go up rather than down.
Get an edge on the competition
Experienced traders are able to identify pricing opportunities that only occur in the pre-market and post-market trading sessions. Because of the specific dynamics of the market environment at these times – such as increased volatility and larger spreads – some investors will be able to find better prices for their intended trades, most notably when they’re seeking to take atypical or contrarian positions.
Work to your own schedule
Not all investors can trade at the same time their preferred exchange operates, and so the ability to trade outside of normal hours permits them to continue trading nonetheless.
Risks of Buying Stocks Before The Opening Bell
Pre-market price movements are driven by different factors than those during normal trading hours. This can lead to a number of risks that you need to be aware of:
Limited liquidity
There are far more market participants involved in buying and selling securities during the normal trading session than outside of it, meaning that trading volumes in the pre-market session are severely curtailed in comparison.
This causes greater volatility in the prices available, resulting in wider bid-ask spreads and decreased liquidity.
Orders may not be executed
Price uncertainty can also be exacerbated during pre-market trading, due to the fact that prices at this time are only informed from a limited pool of traders operating from a small number of ECNs and ATSs. This negatively impacts the proper functioning of price discovery, leading to stock quotes that can diverge massively from those obtained during regular hours.
A consequence of this price discrepancy is that many brokerages will only take limit orders for pre- and post-market trading. The reason for this is to protect investors, ensuring that the trader either knows the highest price for a security they’re buying, or the lowest price for one they’re selling. The knock-on effect of this, however, is that many orders will go unmatched.
Competition from professional institutions
Unfortunately, many of the traders who participate in pre-market trading belong to the big financial institutions, and are often privy to better sources of information than retail investors are. Furthermore, their greater cash reserves also makes it harder for the average trader to get the best prices given the worse spreads on offer.
Can You Buy Stocks After The Opening Bell?
Because of the ubiquity of ECNs, pre-market and after-hours trading is much more popular today than it’s ever been before.
Nevertheless, most trading still occurs during the primary daytime trading hours, and, for many investors, this might remain the best time to trade depending on your own particular situation.
The risks associated with trading during normal hours are much less severe than those trading outside of them, and so it’s usually the safer option for most people. However, it’s always important to know the exact trading times for the asset and exchange you’re involved with, especially if you’re using leveraged instruments. If price movements change and you’re not able to rectify your position, you might end up on the wrong side of a badly losing bet.
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