Pre-Market Trading Definition

What Is Pre-Market trade ?

Pre-market trading is the period of trade natural process that occurs before the even market session. The pre-market trade session typically occurs between 8 ante meridiem and 9:30 ante meridiem EST each trade day. many investors and traders watch the pre-market trade activeness to judge the military capability and steering of the commercialize in anticipation of the regular trade session .

Pre-market trade can only be executed with limited orders through an “ electronic market ” like an option trade system ( ATS ) or electronic communication network ( ECN ). market makers are not permitted to execute orders until the 9:30 ante meridiem EST open bell.

Understanding Pre-Market trade

Pre-market trade activity broadly has limited volume and liquidity ; therefore, large bid-ask spreads are common. many retail brokers offer pre-market trade but may limit the types of orders that can be made during the pre-market menstruation. several direct-access brokers permit access to pre-market trade to commence equally early as 4 ante meridiem EST from Monday through Friday .

It is significant to remember there is very little action for most stocks sol early in the morning unless there is news. The liquidity is besides highly thin, with most stocks only showing stub quotes. Index-based exchange-traded funds ( ETFs ), such as the SPDR S & P 500 ETF ( SPY ), have moving quotes due to the trade in the S & P 500 futures contracts. Many of the most widely held acme holdings in benchmark indices may besides get bowel movement in the event of a meaning gap up or down in the S & P 500 futures. Large-cap, wide held stocks such as Apple Inc. ( AAPL ) tend to get trades american samoa early as 4:15 ante meridiem EST .

after-hours trading was introduced before pre-market trade. The New York Stock Exchange ( NYSE ) introduced after-hours trade in June 1991 by extending trade hours by an hour. The move was a reply to increased competition from external exchanges in London and Tokyo and private exchanges, which offered more hours of trade, and 2.24 million shares changed hands in two sessions of trading. Over the years, as exchanges became increasingly computerized and the Internet ‘s scope go around across borders, NYSE began extending the number of hours of trade available for trade, finally allowing pre-market trading between the hours of 4 ante meridiem and 9:30 a.m .

Key Takeaways

  • Pre-market trading is trading that occurs between 4 a.m. and 9:30 a.m. EST.
  • Pre-market trading is characterized by thin liquidity, low trading volumes, and large bid-ask spreads.

Pre-Market trade : Benefits

Pre-market trade and after-hours trading—collectively known as extended-hours trading—share alike benefits and risks. Let ‘s count at the benefits first :

  • Provides an opportunity to react early to overnight news: Pre-market trading provides the retail investor with an opportunity to react to overnight news before the regular trading session commences. Such news could be corporate earnings (although most companies report earnings after markets close, rather than before the open) or a major company announcement, overnight breaking news such as a geopolitical development, or news emanating from overseas markets. The caveat here is that the pre-market reaction to such news may reverse in the regular trading session. The limited trading volume in the pre-market may provide a signal of weakness or strength that may not be borne out when the market opens and regular trading volumes are reached. For example, a stock that reports an earnings miss may be down significantly in pre-market trading but could reverse course and end the day higher in the regular session.
  • Convenience: This is a major benefit for the do-it-yourself investor because not everyone has a schedule that permits trading during regular market hours. The ability to start the day early and place trades in the pre-market is a big advantage for most people due to the frenzied pace of everyday life.
  • Get a jump on the competition: Astute traders and investors who are familiar with trading patterns and experienced in extended-hours trading may use the pre-market to buy or sell stocks at more favorable prices, compared to prices obtained by other traders in the regular session. This is only possible if the pre-market reaction to news about a stock is accurate, and the stock does not fully discount the news in pre-market trading. In such instances, a stock that trades higher in the pre-market will continue to trend significantly higher in the regular trading session, while a stock that trades lower in the pre-market will trend lower during regular trading.

Pre-Market trade : Risks

We now turn to the risks of pre-market trade, which include :

  • Limited liquidity and wide bid-ask spreads: The number of buyers and sellers of stocks is far fewer in the pre-market, compared with the multitudes of traders and investors during regular trading. As a result, pre-market trading volumes are generally a fraction of volumes in the regular session. Low trading volumes result in limited liquidity, greater volatility, and wide bid-ask spreads.
  • Price uncertainty: Prices of stocks traded in the pre-market may diverge significantly from the prices of those stocks during regular hours. Apart from the impact on stock prices from vastly differing trading volumes in pre-market and regular sessions, pre-market stock prices may only reflect prices from a single or handful of electronic communication networks (ECNs). During regular trading hours, multiple exchanges, ECNs, and market makers provide stock prices, leading to better price discovery; the stock quotes shown are consolidated and represent the best bid and offer across all trading venues.
  • Limit orders may result in non-execution: Many brokerages only accept limit orders in extended-hours trading, so as to protect investors from unexpectedly adverse prices. Limit orders can only be executed at the limit price or better. The benefit of this feature of limit orders means that the investor knows the highest price at which a stock will be bought or the lowest price at which it will be sold. But this also means that if the market moves away from the limit price, the order will not be executed.
  • Competition from institutional traders: Retail traders face an uneven playing field in pre-market trading because many of the participants are institutional and professional traders who have a trading edge on account of much deeper pockets and access to better, more timely information.

These risks mean that lone know traders should consider trade in the pre-market because the odds are stacked against retail traders. Seasoned traders have the cognition and experience to gauge the many nuances that make trading a challenge—such as assessing whether the pre-market reaction to the news is an under-reaction or over-reaction—and taking decisive action on trade matters like opening a new neckcloth put or closing an existing one, setting limit prices at certain levels for buy and sells, etc .

When Does Pre-Market Trading Begin?

Pre-market deal can start equally early as 4 ante meridiem EST, although most of it takes place from 8 ante meridiem EST and before regular deal commences at 9:30 ante meridiem EST .

What Securities Can Be Traded in the Pre-Market Session? Options?

broadly, only list stocks can be traded in the pre-market school term. not all stocks, though. Stocks such as those that have a limited float or are not wide held, or small-capitalization stocks, may not have sufficient volumes to make pre-market deal a feasible proposition. Options can not be traded in the pre-market school term .

Do Online Brokers Offer Pre-Market Trading?

about all on-line brokers offer pre-market trade, although the hours differ from one broke to the early. here ‘s a sample of pre-market trade hours at choice on-line brokers as of Dec. 21, 2021 ( note that these hours may be subject to change ) :

  • TD Ameritrade offers pre-market trading from 7 a.m. EST to 9:28 a.m. EST.
  • At Charles Schwab, pre-market orders can be placed between 8:05 p.m. (on the previous trading day) and 9:25 a.m. EST, and are eligible for execution between 7 a.m. and 9:25 a.m. EST.
  • E*TRADE offers pre-market trading from 7 a.m. EST to 9:30 a.m. EST.
  • Interactive Brokers has pre-trading for its “IBKR Pro” accounts from 4 a.m. EST to 9:30 a.m. EST, and for its “IBKR Lite” accounts from 7 a.m. EST to 9:30 a.m. EST.
  • At Robinhood, the pre-market trading session is from 9 a.m. EST to 9:30 a.m. EST; trades may still be executed as early as 8:58 a.m. EST.
  • Webull allows pre-market trading from 4 a.m. EST to 9:30 a.m. EST.

Can a Limit Order From Pre-Market Trading Carry Over into the Regular Session?

In most cases, limit orders from pre-market deal are lone valid for that particular school term and if not executed, do not carry over into the regular session. however, synergistic Brokers permits limit- or stop-limit-type orders that can be active voice in all deal sessions including pre-market, regular trade hours ( RTH ), and after-market ; for such orders, the attribute “ Allow Outside RTH ” needs to be added .

Why Are Extended Trading Hours Necessary?

drawn-out trade hours enable investors to react to news and events when the markets are closed. It is besides a commodious way to trade for people who can not buy and sell securities during the regular trade school term .

What Is the Nasdaq-100 Pre-Market Indicator?

The Nasdaq-100 Pre-Market Indicator is calculated based on the final sale of Nasdaq-100 securities during the pre-market trade menstruation of 8:15 ante meridiem to 9:30 ante meridiem EST. For Nasdaq-100 securities that do not trade in the pre-market, the calculation uses the last sale from the previous day ‘s 4 post meridiem conclusion price. The Nasdaq-100 Pre-Market Indicator and After Hours Indicator are useful gauges of market sentiment during offer trade hours.

Is 24-Hour Trading for Stocks Going to Be a Reality Soon?

The 24-hour trade that is a feature of speech of the foreign exchange and cryptocurrency markets may come to fairness markets within the following few years. 24 Exchange, a Bermuda-based crypto and extraneous switch over trade chopine, aims to bring the around-the-clock trade of the digital currency kingdom to the neckcloth commercialize. In October 2021, 24 Exchange filed forms with the Securities and Exchange Commission in hopes of receiving a license to commence operating a 24-hour substitution in 2022 .

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Category : Finance

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