Pre-Market Trading

Pre-market trading is a strategy to trade securities before the beginning of the regular stock trading session. Generally, this occurs between 8 a.m. and 9:30 a.m. Eastern Time (ET). However, it can start shortly after 4 a.m. E.T. The live pre-market trading strategy allows investors to capitalize on off-hour incidents and news.

This procedure transpires on electronic exchanges like electronic communication networks (ECNs) or alternative trading systems (ATS). Moreover, market makers can execute pre-market stock trading orders only after the opening bell of the core trading session at 9:30 a.m.

Table of contents

• What Is Pre-Market Trading?
  • How Does Pre-Market Trading Work?
  • Examples
    • Example #1
    • Example #2
  • Advantages Of Pre-Market Trading
    • #1 - More Convenient
    • #2 - Reaction To More Recent Events
    • #3 - Instant Determination Of The Open-Price
    • #4 - Offers A Competitive Edge
  • Risks of Pre-Market Trading
    • #1 - Broader Buy-Ask Spread
    • #2 - Shortage Of Liquidity
    • #3 - Massive Price Deviations
    • #4 - Unsuitable For Novice Investors
  • Frequently Asked Questions (FAQs)
  • Recommended Articles
• Pre-market trading refers to a trading period held before the start of the typical trading session. It occurs via the “electronic market” such as ATS or ECNs.
• It typically happens from 8 a.m. to 9:30 a.m. ET but can begin as early as after 4 a.m. ET.
• The advantages include convenience, reaction to more recent events, the quicker discovery of the opening price, and competitive benefits.
• The risks involved are broader buy-ask spread, liquidity shortage, extensive price fluctuations, and requirement for professional experience.

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Pre-market trading permits investors to trade market securities on electronic markets before the commencement of the typical trading day. In the same vein, New York Stock Exchange (NYSE) Arca is a prominent ECN operating from 4 a.m.to 9:30 a.m. ET as pre-market trading hours.

This trading approach is certainly advantageous for both private and institutional investors. They examine pertinent aspects like political unrest, international events, court decisions, regime change, and professional market analysis. Moreover, it assists them in forecasting the anticipated direction of securities in the normal trading session.

Investors must not impulsively follow the pre-market trading live trends and examples and consider all possibilities before proceeding further. Due to the high-risk involved, investors prefer to analyze this session rather than active participation. Hence, the approach is befitting for expert and knowledgeable traders but even the individual investors can utilize the same. For example, they may consult with experienced financial advisors to cash in on the pre-market trading strategy.

pre-market and core trading is liable to distinct regulations. Additionally, different brokerage firms and ECNs have varying protocols for pre-market stock trading. Therefore, investors must always compare them before indulging in the process.

Here are some pre-market trading examples to easily understand the concept.

Example #1

A multi-national insurance firm released its quarterly income statement at 8:15 a.m. Contrary to the investors’ expectations, it fared poorly in the market. The huge revelation certainly causes a major change in its stock market rates, resulting in extensive market instability.

Fin, a shareholder of the firm and currently trading during the pre-market hours, gets to know about this. He decides to cash in on the opportunity and quickly sells his shares before the core trading session begins. As soon as the clock strikes 9:30 a.m., his order is executed, and Fin saves himself from facing a huge financial loss.

Example #2

A few major firms grabbed headlines for their trading performance during pre-market hours on 26 April 2022.

1. General Electric – Irrespective of the optimistic predictions in its quarterly report, its stock crashed 3.5%. As per the firm’s official statement, supply chain concerns and inflation are the major challenges.
2. PepsiCo – The shares fell in the pre-market hours, despite spotting a beat on the bottom and top lines in the latest quarter.
3. 3M – It witnessed the $8.83 billion in revenue, which was way higher than the $8.74 billion.
4. United Parcel Services – The shipping and logistics company’s shares were boosted by 1.7%. It reported the adjusted earnings per share (EPS) of $3.05 on returns of $24.38 billion, in contrast to the analysts’ expectations of $2.88 EPS on $23.79 billion in revenues.
5. SeaWorld – The shares of this theme park and entertainment firm rose by 4.6%.
6. D.R. Horton - The stocks increased by 2.8% and reported an EPS of $4.03 on $8 billion in revenues. This contradicted the analysts’ expectations of $3.37 EPS on revenues of $7.62 billion.

Here are some pre-market stock trading advantages:

#1 - More Convenient

The typical trading period might not be suitable for all investors. In this case, the availability of a trading session before the beginning of the core period ensures the convenience of every interested investor out there.

#2 - Reaction To More Recent Events

Most important updates and administrative reports are generally presented right before this session (early in the morning). So, investors can review them and then contemplate the pre-market trading live trends for a profitable investment. Precisely put, it lets the news distribution be cashed in more swiftly.

#3 - Instant Determination Of The Open-Price

Both institutional and informal traders constantly attempt to get ahead of each other during the pre-market hours. They begin trading right after receiving the market updates, which certainly triggers the discovery of the opening price.

#4 - Offers A Competitive Edge

Owing to the risks involved in this trading session, the number of participants is quite less. The lesser the competition, the more are the chances to succeed. Experienced investors can exploit this opportunity to use their professional insight at its best.

Now, let’s discuss the threats involved during pre-market trading hours:

#1 - Broader Buy-Ask Spread

Restricted trading volume leads to a wider bid-ask spread. Consequently, it complicates the order execution activity for both sellers and buyers.

#2 - Shortage Of Liquidity

The absence of liquidity and less competition throughout the session makes the order matching procedure difficult for traders. There might be a situation with no sellers or buyers to fill the order. Subsequently, this results in huge price inconstancy or greater instability.

#3 - Massive Price Deviations

The rates of stocks traded during the pre-market hours may drastically change during the typical trading session. Moreover, changes in the stock prices are more uncertain during this trading period than during the regular hours. This is due to not being obligated to acquire the best available price.

#4 - Unsuitable For Novice Investors

Trading during the pre-market hours is not fruitful for all investors. Only the experienced and well-trained ones with investment products like mutual funds can turn this opportunity into a profitable venture. Moreover, impulsive or amateur investors are at a high risk of monetary loss in this situation.  Nonetheless, novice investors must try it out with the help of a financial expert.

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This article has been a Guide to Pre-Market Trading and its meaning. Here we explain the pre-market stock trading strategy, its benefits, risks, and examples. 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