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. 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?
Pre-market trading refers to the time period which is before the beginning of the official trading session in the stock exchange. During his time also, investors and traders can place orders for buying and selling.
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. 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. is low during pre-market trading, 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.
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 analysis 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.
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Pre-Market Explanations in Video
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 pre-market stocks 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. with the help of different tickers. Therefore, a trader already into trading can learn about the current volumes and the negative and positive imbalance in shares.
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). 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.
This concept was initiated to reduce the volatile nature of securities within the market. This pre-market analysis session is conducted from 9:00 am to 9:15 am EST. The trading orders are taken, modified, and even canceled in the first 8 minutes of this trading session, from 9.00 am to 9.08 am.
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.. 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?
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. 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, etc and such other professional traders and not individual investors. However, individual investors were also welcomed to participate in this trading later on. However, the typical participants are as follows:
- Institutional investors – They are the mutual fund, hedges fund or large investment firms. They have direct access to the market and special arrangements with brokers or exchanges.
- Professional traders – They may be individuals or firms who can trade in pre-market stocks using some special trading softwares or platforms for the purpose.
- The market makers – They provide liquidity to the market by constantly participating in the bid and ask prices. The help in maintaining an order in the market.
- Experienced investors – Some qualified investors get access to trade in the pre-market session from their brokerage firms in exchange of meeting some special criteria or account balances.
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.
There are some rules and regulations related to the exchange of the brokerage firm the should be strictly followed. However, let us look at the advantages of the same.
- 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 corporate earning anouncements, or any important economic data 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 pre-market, the chances of eroding share value are negligible. Participating during this time provides more options for order execution.
- This session may have volatility due to low volume and fewer participants. However, some traders can use this opportunity to earn for the short term by using price fluctuations.
- It helps positional traders manage risk before the market opens. Any pre-market data, news, or events taking place overnight may affect prices. This session helps in adjusting the portfolio as per the price fluctuations.
- It also offers time flexibility to those who are unable to track the market during normal trading hours.
Along with advantages, there are some disadvantages of the system which should also be analysed before using it. Let us look at them in details.
- 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. Since they are experts, they can use their own advanced strategies and ideas to control and regulate the prices for their own benefit which might prove harmful for small and inexperience investors and confuse them.
- Such sessions can also be quite expensive since brokers might charge an extra commission on extended hour trading along with their regular commission. It may make the session hard to afford for many and may discourage them from investing in the market since they may not have time during normal trading hours and pre-market is also proving to be expensive.
It is important to note that this session also has many risks that should be analysed. There might be higher volatility or less liquidity. Sometimes every security is not available for trading during this time. Therefore proper strategies must be used when using this session based on the investment aim and risk tolerance.
Pre-Market Vs After Hours
Both the terms are related to the trading hours in the stock market. However, there are some important differences between them, as follows:
- The former is the time before the nomal trading hours begin and the latter is the time after the normal trading hours end. However, both depends on the exchange or the brokerage platform.
- The former allows investors and traders to react to any pre-market data like news or events related to the market that has taken place overnight, whereas the latter allows the same thing, but which has happened throughout the day.
Thus, the above are some basic differences between the two.
This article has been a guide to what is Pre-Market. We explain its trading, the time and who can trade, differences with after market along with example. We also discuss the advantages and disadvantages. You can learn more about accounting from the following articles –