What is Pre-market Trading?
Pre-market trading refers to activity in the stock market that happens before the regular market session opens. During the regular hours, many brokers find the stock market extremely crowded and hence, they prefer a less packed time to trade i.e. either during pre-market or post market.
In this blog, we will learn all about the pre-market trading.
A pre-market trade is not for everyone. Before you rush into it, there is a lot of research which is required to enter into it. Each broker has their own rules and available times for pre-market trading which you need to look out for in advance.
Pre-market Trading Hours:
Although the pre-market trading hours happens between 4:00 a.m. and 9:30 a.m EST, it usually varies from broker to broker. A broker may settle to offer pre-market trading hours from 4:30 a.m. EST to 9:30 a.m. EST, while another may offer it from 7:00 a.m. EST to 9:30 a.m. EST.
Advantages of Pre-market Trading:
- If you don’t want to buy stocks during pre-market hours, it is still beneficial since it will give you an advance information and insight about the stocks once the market opens. Thus, you can analyze and judge the direction and strength of the market during regular trading hours.
- It also provides you the power to immediately react to news items, such as earnings reports. Once the market opens, there might be potential massive movements and thus you will be too late to place a trade to ride the earnings reaction.
Disadvantages and Risks of Pre-market Trading
- In comparison with the regular trading hours, the fees and rules associated with pre-market trading can be different. This factor usually varies from broker to broker.
- The volume of stock exchanges is quite less during the pre-market trading hours. Thus, making it difficult for the traders and brokers to execute some of the orders.
- This usually has higher risks as compared to the regular trading hours. It is because of the fewer trading activities, market movements and volumes during these hours. Following are the side effects associated:
- The fluctuation in the prices in the market is higher than the regular trading hours.
- The spreads between the bid and ask price is wider.
How is it executed?
This type of trading is executed with limited orders using ECNs i.e. Electronic Communication Networks. It is a computerized system that automatically matched the buy and sell orders, thus eliminating the need of a middleman. It will connect the brokers to the individual traders directly for trading purpose. This helps in making the process fast and convenient.
I hope you have got an understanding of pre-market trading. In my next blog, we will be talking about its strategies.