Pre market trading is the buying and selling of stocks on electronic market (ECM) exchanges that are open before regular stock markets.
How does it work?
Buying Stocks Pre market in the U.S takes place between the hours of 8:00 and 9:30am EST.
Until recent times, these markets were open only to major institutional investors that had the confidence and capital to take part in more risky and more difficult trading methods. Although the pre-market trading volume is still pretty low, it is higher than it used to be since these times are now open to regular retail investors, and they have become more accustomed to the ideas of trading on the electronic market.
Electronic communication networks connect buyers and sellers via a digital market, meaning that organisations that act as a link between buyers and sellers are not needed, such as investment banks and stockbrokers. An example of an ECN is NASDAQ, which is a network of traders that engage directly with each other.
Why is it important?
The pre market trading hours allow investors to act fast based on news that they have received based that they believe could affect positively or negatively the share prices of a company. This news could include new product releases, financial disasters, political problems etc.
Risks
The pre market trading sessions have reduced liquidity, and they are therefore more difficult to sell stock on. Traders should remember that if news is released and it is not good, and the trader want to get rid of their shares fast, there is a chance that it will not be possible, particularly if the shares are for a small non-blue-chip company.
Prices are also more volatile during the pre trading hours, since they are utilised by mostly professionals and the volume of trading is not as high as that in the normal hours. This means that prices are much more volatile.
When trading in the pre and post market hours, traders will undoubtedly experience more technology-related glitches that they will have to manage, such as lengthy delays on orders, and the chance that orders could not be executed at all.
During normal market trading hours, a selection of varying order types are accepted (such as limit orders, stop-limit orders, etc.). On the contrary, only limit orders are accepted during pre market trading hours. The normal trading hours market accepts orders without regard to their size, however pre market hours trading sessions have a maximum order limit of 25,000 shares in any one order. The regular market offers availability of different time limits as well, whereas in the pre market (and post market hours), any orders placed are only valid for the session during which they were made.
Is Pre Market Trading Advisable for the regular trader?
Pre market trading has its advantages for traders that are trying to make returns based on news that they think is going to be released, and they might also provide the potential to enter a new stock if that news makes them think it is wise to. However, the pre market trading hours tend to be dominated by professional traders, and it is a good idea to be before entering these sessions. For the normal trader, regular trading hours have far better availability of liquid assets and are far more efficient. Normal hours provide prices that are fairer.