Pre-Market
By Madhuri Thakur | By Dheeraj Vaidya, CFA, FRM
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 the regular trading sessions.
In the case of pre-market activity, large bid-ask spreads are quite common since the volume and liquidity is too limited. Trading before 8 am EST has lower benefits when compared with the trading 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 as a result of the presence of the large bid-ask spread.
How Does Pre-Market Work?
As implied by its name, pre-market trading takes place before the stock market starts to operate for its normal hours of trading that is 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, and this is mostly because of the fact that liquidity is low during pre-market, and the use of market orders can result in trades execution at unjust prices.It is why brokers do not allow the use of market orders beyond normal trading hours. However, some brokers may allow trading, and if a limit order is placed and specified as Ext, then the trade might happen in real-time.
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 keep an eye on the ongoing fluctuations in the relevant stock and securities.The traders observe the difference in sales and purchase orders with the help of different tickers. A trader who is already into trading can learn about the current volumes along with the negative and positive imbalance on shares.
What Time Does the Pre-Market Open?
In this, trading takes place from 4.00 am EST to 9.30 am EST. The after-hours trading with respect to normal session occurs from 4.00 pm EST to 8.00 pm EST. Most of the 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 or securities within the market. This trading session is conducted from 9:00 am to 9:15 am EST. In the very first 8 minutes of this trading session that is 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 orders. After 9.08 am and until 9.15 am, traders cannot place new orders, and the orders that were placed until 9.08 am are matched and accordingly confirmed. 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?
Earlier trading was allowed only for institutional investors like mutual funds and such other professional traders and not in the cases of individual investors. However, later on, individual investors were also welcomed to participate in this trading. 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 corporates are seen to 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, then the market gets a sufficient amount of 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 share value to get eroded are negligible.
Disadvantages
One of the significant risks is the lack of ETFs and liquidity in most of the stocks. As a result of low levels of liquidity, there are wild swings and tremendous fluctuations in the price of shares prior to 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 the 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 the 9:30 am EST. The pre-market session is used by the different traders like the individual investors and the institutional investors for determining the strength and direction of the stock market to perform the normal trading sessions.
Large bid-ask-spreads are quite common in pre-market activity as the liquidity and volume are really low. Traders can avail of strategic time importance from the pre-market sessions and may not have to worry about the value of a share to get eroded. However, it must also be noted that pre-market trading could be a little complicated and expensive at the same time. |
