Is Premarket Trading a Risky Strategy?

The normal stock trading hours for the New York Stock Exchange usually run between 9:30 am and 4:00 pm every day. However, depending on the brokerage that you choose to work with to make your investments, you might be able to continue buying and selling stocks when the standard trading floors are closed. Depending on the time of day you choose to trade, you’ll either be involved in premarket stock trading or after-hours trading.

Premarket trading is complicated, because it’s not as simple as just being able to access the same market earlier than you would have been able to with a different broker. Instead, you have different challenges and risks to think about when you’re handling trades in the early hours of the morning. For instance, there’s very little liquidity at this time.

The Problems with Premarket Trading

There’s not always a lot of benefit to getting up early and trading before the rest of the market has gotten out of bed. Generally, the only reason to do it is if you’ve heard something in the after-hours news that makes you feel as though you need to buy or sell a share of stock as quickly as possible. Ultimately, the premarket trading environment is more likely to be used by investors who want to gather additional information to help them build a plan for how they plan to spend their money through the day. Pre and after market hours are more popular with pattern day traders and the like.

The trouble with trading in the premarket is that very little action happens during this time. That means that it’s tough to find a buyer or seller when you need one. Executing trades and determining the right price for those trades isn’t as simple as it should be. This is particularly true if you’re handling stocks with volumes that aren’t particularly high in the first place. Additionally, the price of stocks in the early hours can be a lot more volatile than you would expect at other times in the day. The limited volume of the shares means that prices often rise and fall more rapidly than usual. Sometimes, the price of a stock can even change suddenly again before the official opening bells ring, which make the prices in the premarket particularly deceptive.

Is There Any Upside to Premarket Trading?

With so many risks to consider, you might be wondering whether there’s any upside to premarket trading at all. The simple answer is that there are some benefits to trading early – but only in the right circumstances. For instance, premarket trading can represent an ideal opportunity for sophisticated and experienced investors. It’s a great tool if you know something that the rest of the market doesn’t know, and you want to take advantage of that fact. However, the risks involved with this investment strategy mean that it’s more likely investors will spend their time watching the market than interacting with it. As with any trading effort, the best thing you can do is make sure that you have a plan in place to protect yourself against the risks and threats of premarket trading and go from there.

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