Definition of Pre-Market Trading
Pre-Market Trading is the trading on the stock exchange that occurs before the normal business hours due to less trading volume and a wider spread between the bid and asks the price and pre-market trading is mostly done by experienced brokers or professionals with large institutions such as mutual funds who may have more information and knowledge than normal investors.
In U.S. normal Trading hours are between 9.30 a.m. to 4 p.m. every business day and the pre-market session occurs between 8.00 a.m. to 9.30 a.m. Eastern time the reason behind pre-trading is many companies report their earnings either before or after the closure of normal business hours and the intrinsic value of the stock is changing continuously whether the market is open or not and people want to access the market when the intrinsic value is changing.
This allows the investors to act quickly to major events that can affect the market such as sudden corporate misfortune, sudden political changes, or an emergency situation, etc. This is consists of more risk as compared to normal market trading as it involves predictions about market situations hence it is mostly done by experienced brokers, investors, or professionals. There is some direct access trading platform that enables trade to start off as early as 4 am Eastern time.
How to Trade Pre-Market?
Pre-market trades are executed on computer-based systems including electronic communication networks. The investor has access to pre-market session places the order of buying or selling. When an order for the desired stock is entered in an electronic communication network at the pre-determined rate the electronic communication system keeps track and tries to find the matching order in pre-market session time if the desired order is not executed during pre-market session time it gets automatically canceled. The trader has to mark the order as pre-market if a selection of pre-market is not done the order is deemed as placed for regular trading.
Example of Pre-Market Trading
Company ABC Ltd. has declared its quarterly results before the market opens for regular trading. The result of the company is not as per investors’ expectations so there are chances of the price of shares being fall. Mr. M who has access to Pre-market session entered his order of selling the shares at pre-determined prices in pre-market sessions to save his investment and from suffering loss.
Who can trade Pre-Market?
Earlier only institutional investors and large brokers were allowed to trade during pre-market but due to computerized executions, it’s now available to all including retail traders. Some brokers charge extra fees from their clients for trading in premarket sessions due to less liquidity.
Uses of Pre-market Trading
- Some investors monitor to analyze the situation and price of the stock when actual trading starts.
- Traders also use to try to get ahead of the response of market situations like political instability or law changes etc.
- Traders use pre-market trading to avoid the risk of loss or to get more profit.
- When a trader wants to sell or purchase large stock pre-market trading is used for limit pricing or quantity.
Difference between Pre-market Trading Hours and After-market Trading Hours
Pre-market trading allows the traders to trade before the normal market opens for trading whereas post-market trading allows the traders to trade after the normal market trading closes. This affects the opening price of a stock in the normal trading market whereas on the basis closing price of the normal market the post-market trading price of the stock is determined. Normal hours for pre-trading are between 4 am to 9.30 am and for post-trading are between 4 p.m. to 8 p.m. the pre-market prices are based on predictions whereas post-market prices are real and based on research as compared to pre-market as the price decided after news or results releases. Professionals or experienced persons normally trade during pre-market and all investors including retail investors trade during post-market. Risk in the pre-market is high as compared to the post-market. They are generally researchers and quick responders and post-market are an analyst.
Below mentioned are some of the benefits:
- These traders can quickly access the situation and can make the trade beneficial for them.
- They get benefited due to the low volume of trading.
- This helps marketers in discovering the open price of a normal market.
- This reduces volatility.
- Helps the investors to sell or buy limited price or quantity order stocks.
- It can be based on the normal trading market.
Risks of Pre-market Trading
- There is poor liquidity hence risk involved is high.
- The spread between buying and ask prices are higher in pre-market as compared to normal trading hours.
- The price during pre-market trading hours might not reflect the share prices during regular hours.
- Due to the lack of volume price, rise or fall fluctuates more rapidly as compared to the normal market.
Pre-market trading allows traders to trade before the normal trading market. Earlier pre-market trading access was given to selected investors but with the changing in technology it is now available for all investors. If an investor wants to trade during pre-market, he has to enter desired order and stock details in an electronic communication device then the device tries to match the order to make it in the executable transaction but if an order does not become a transaction before the normal market the device automatically cancels the order.
Normally professionals or experienced investor trade in the pre-market session. This is different from post-market trading in terms of timing, risks, volatility, price, market situations, etc. pre-market session timings in the US are between 8 a.m. to 9.30 a.m. but some direct access trading platform that enables trade to start off as early as 4 am Eastern time whereas the post-session timings are between 4.00 p.m. to 8.00 p.m.
The risk in the pre-market is more as compared to the post-market. These are mostly the quick respondent and researchers and post-market traders are analysts who react after analyzing the market. The pre-market price is depending on predictions and post-market session prices are dependent upon market conditions. This liquidity is low and the risk is high.
This is a guide to Pre-Market Trading. Here we discuss the introduction along with the examples, explanation, and differences along with risks and benefits. You can also go through our other related articles to learn more –
- Trading Floor | Types of Traders on Trading Floor
- Market Maker Tutorial | How Market Makers Impact Liquidity
- Trading Securities | Accounting Standards for Trading Securities
- What is Trading on Equity?