WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Free Tutorials
  • Certification Courses
  • 250+ Courses All In One Bundle
  • Login
Home » Investment Banking Tutorials » Investment Banking Basics » Pre-Market Trading

Pre-Market Trading

What is Pre-Market Trading?

Pre-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). Such trading activities are watched by many of the investors and traders to judge the strength and the direction of the market so that regular trading session could be anticipated.

Many investors like to do trading in the pre-market session because they want to take advantage of the competition by quickly reacting to the news announcements, which occur when the regular market for trading is closed.

Pre Market Trading

Example of Pre-Market Trading

Company XYZ Ltd. released its earnings report for the quarter before the market opens for regular trading. The results of the company missed the expectations of the investors, which are prevailing in the market for the stock of the company. Mr. A, who has a good amount of holding in the company XYZ, also has access to trade during the pre-market trading hours.

Popular Course in this category
Sale
Investment Banking Training (117 Courses, 25+ Projects)
4.9 (831 ratings)
117 Courses | 25+ Projects | 600+ Hours | Full Lifetime Access | Certificate of Completion
View Course

Declaration of the earnings of the company causes the substantial movement in the prices of the underlying stocks, and the largest reaction occurs typically when the company substantially misses the expectations or substantially exceeds the expectations of the investors. In the present case, expectations of the investors are missed, so the price of the stock will probably decrease. Now, Mr. A is having access to trade before the market gets open, so this will allow him to react quickly to the initial reaction, i.e., negative news about the company’s earning, and Mr. A will sell the shares during the pre-market trading hours to save his investment.

Advantages

Some of the advantages are as follows:

  • With its help, one can get early access to the market and trade according to the news which got released when the market was closed as some of the essential news and announcements are there which are reported after the regular trading hours of the market or over weekends causing the potential massive movements in the market. Like natural disasters are unexpected events that can occur anytime. If the person is having the early access of the market before the market gets open, i.e., during the pre-market trading hours, then it allows him to hedge himself against the risk caused because of such unforeseeable events.
  • By watching the activities during the pre-market trading, many of the investors and traders can judge the strength and the direction of the market so that regular trading session could be anticipated in advance.

Disadvantages

  • During the regular trading hours, most of the stocks can be trade readily and easily by the buyers and the sellers with one another in the market. In contrast, during the pre-market trading hours, the trading volume of many of the stocks is less, which makes it more difficult for the buyers and the sellers to execute some trade orders.
  • As there are fewer trading activities during these hours, spreads are wider between the bid prices and the ask prices. It makes it more difficult for the buyers and the sellers to execute their orders or to get favorable prices for the orders which are possible during the regular hours of the market.
  • As there are limited trading activities during these hours, it is common that there will be significant fluctuations in the prices in the market than the fluctuations which are present during the regular hours of the market.
  • Many of the persons who trade in the market during the pre-market trading hours are professionals with large institutions like mutual funds. These persons generally have access to more information when compared with individual investors. It gives an extra advantage to those professionals who work with the large institutions which the individual investors cannot get.
  • Many of the electronic trading systems accept only the limit orders currently in pre-market sessions. These limit orders may lead some of the investors to miss out on the trade, which is filled by them.

Important Points

  • There is a sizeable bid-ask spread during the pre-market trading hours because, during that period, there is limited liquidity and volume. It makes it more difficult for the buyers and the sellers to execute their orders or to get favorable prices for the orders.
  • It is offered by many of the brokers, but the types of order which can be used are limited during that period.
  • During the pre-market trading hours, the trading activities are limited, so, commonly, there will be significant fluctuations in the prices in the market.

Conclusion

Pre-market trading provides the opportunity for the investors to trade in the shares before the opening of the regular market session. Generally, activities in the market are significantly less unless some news is there. With this, one can get early access to the market and trade according to the news, which got released during the hours when the market was closed. There is a sizeable bid-ask spread during the pre-market trading hours because, during that period, there is limited liquidity and volume. It is offered by many of the brokers, but the types of order which can be used are limited during that period.

Recommended Articles

This article has been a guide to what is Pre-Market Trading and its definition. Here we discuss the example of pre-market trading along with advantages and disadvantages. You can learn more about accounting from the following articles –

  • Stop Limit Order
  • What is a Bull Market?
  • Primary Market vs. Secondary Market
  • Workings of a Stock Market
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

New Year Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More