What is Pre-Market?

The pre-market can be defined as the execution of trading activities during a period that falls before the normal market session, and it takes place from 4.00 am to a maximum of 9.30 am EST. The investors and traders use it for judging the strength and flow of the market for conducting regular trading sessions.

In the case of pre-market activity, large bid-ask spreadsBid-ask SpreadsThe asking price is the lowest price at which a prospective seller will sell the security. The bid price, on the other hand, is the highest price a prospective buyer is willing to pay for a security, and the bid-ask spread is the difference between them.read more are quite common since the volume and liquidity are too limited. Therefore, trading before 8 am EST has lower benefits when compared with the trading that is done after 8 am as the market is really thin during this time. It can also be quite risky to trade before 8 am EST since there is a chance of diving in losses due to the large bid-ask spread.

How Does Pre-Market Work?

  • As implied by its name, pre-market tradingPre-market TradingPre-market trading is trading in the stock market, which occurs before the opening of the regular market session (usually 1 to 1.5 hours before the market opens). Many investors and traders observe it to judge the strength and direction of the market to anticipate the regular trading session.read more takes place before the stock market starts to operate for its normal hours of trading at 9.30 am EST. This trading activity is executed from 4 am to 9.30 am EST. This trading is more or less an extension to normal hours of trading activity.While placing orders through limit orders and market orders amidst normal trading hours, one can only take limit orders into use. This is mostly because liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more is low during pre-market, and market orders can result in trades execution at unjust prices.It is why brokers do not allow market orders beyond normal trading hours. However, some brokers may allow trading, and if a limit order is placed and specified as Ext, the trade might happen in real-time.

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Pre-Market Trading

  • This type of trading is when a transaction is made on the stock exchange before the time at which the market officially starts operating; normally an hour before the substantive session starts functioning. In this trading, the activities are low, and traders watch the ongoing fluctuations in the relevant stock and securities.The traders observe the difference in sales and purchase ordersPurchase OrdersA Purchase Order (PO) serves as a legal document between buyer and seller, wherein, the buyer sends this contract that details the goods and services, date of delivery, payment terms as per the contract etc.read more with the help of different tickers. A trader who is already into trading can learn about the current volumes and the negative and positive imbalance on shares.

What Time Does the Pre-Market Open?

Trading takes place from 4.00 am EST to 9.30 am EST. The after-hours tradingAfter-hours TradingAfter Hours Trading is the stock trading session on the stock markets that starts after the market closure at 4 PM in the US & it is conducted with the help of Electronic Communication Networks (ECNs). read more for normal sessions occurs from 4.00 pm EST to 8.00 pm EST. Most retail brokers prefer to trade between these timings but might restrict the use of certain types of orders at the same time.

What’s Going to Happen at Pre-Market Session?

This concept was initiated to reduce the volatile nature of securities within the market. This trading session is conducted from 9:00 am to 9:15 am EST. In the first 8 minutes of this trading session, from 9.00 am to 9.08 am, the trading orders are taken, modified, and even canceled.

A trader can place market orders or limit ordersLimit OrdersLimit order purchases or sells the security at the mentioned price or better. In the case of sell orders, it will be triggered at a limit price or higher, whereas for the buy orders, it will be triggered only at a limit price or lower.read more. After 9.08 am and until 9.15 am, traders cannot place new orders, and the orders placed until 9.08 am are matched and confirmed accordingly. It means the orders can only be placed during the initial 8 minutes, and that too only upon equity segments.

Who Can Trade-in Pre-Market?

The previous trading was allowed only for institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples.read more like mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more and such other professional traders and not individual investors. However, individual investors were also welcomed to participate in this trading later on. Moreover, the dominant players of U.S. exchanges like NASDAQ and the New York Stock Exchange Euronext have pre-market trading platforms that can be used by individuals as well as institutional investors who prefer trading securities beyond regular trading hours.

Advantages

  • One of the best benefits of trading in the pre-market session is being able to experience strategic time importance. Most corporations make strategic and sensitive market announcements before or after the trading session since they don’t want any sudden jerk in the stock.When such announcements are made in this trading, the market gets sufficient time for digesting the news and analyzes all the possible advantages and disadvantages, and accordingly takes a call on the stock when the market starts operating again.Also, as the volumes are low in pre-market, the chances of eroding share value are negligible.

Disadvantages

  • One of the significant risks is the lack of ETFs and liquidity in most stocks. As a result of low levels of liquidity, there are wild swings and tremendous fluctuations in the price of shares before regular trading hours.The presence of bid-ask-spread tends to widen the extended hours of the session.The presence of professional traders can also complicate short-term trading during extended hours.Such sessions can also be quite expensive since brokers might charge an extra commission on extended hour trading along with their regular commission.

Conclusion

Pre-market lasts from 4 am EST to 9:30 am EST. The different traders use the pre-market session like the individual investors and the institutional investors to determine the stock market’s strength and direction to perform the normal trading sessions.

Large bid-ask spreads are quite common in pre-market activity as the low liquidity and volume. As a result, traders can avail strategic time importance from the pre-market sessions and may not have to worry about the value of a share eroding. However, it must also be noted that pre-market trading could be a little complicated and expensive at the same time.

This article has been a guide to pre-market and its definition. Here we discuss how pre-market works and at what time it opens. We also discuss the advantages and disadvantages. You can learn more about accounting from the following articles –

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