Pre-market trading refers to the time of trading activity that takes place prior to the start of the regular trading session. On most trading days, the pre-market trading period takes place between the hours of 8 a.m. and 9:30 a.m. Eastern Standard Time. Many investors and traders keep an eye on the pre-market trading activity in order to gauge the strength and direction of the market ahead of the main trading session.
Only “electronic markets,” such as an alternative trading system (ATS) or an electronic communication network, can be used to execute pre-market orders with a limited number of available orders (ECN). Market makers are not authorized to execute orders until the 9:30 a.m. Eastern Standard Time opening bell has sounded.
Pre-Market Trading: What You Need to Know
In general, pre-market trading activity is characterized by low volume and liquidity, resulting in wide bid-ask spreads that are typical. A large number of retail brokers provide pre-market trading; however, they may impose restrictions on the sorts of orders that may be placed during the pre-market time. The access to pre-market trading may begin as early as 4 a.m. EST on Monday through Friday, according to a number of direct-access brokerage firms.
It is crucial to remember that, unless there is breaking news, there is usually little movement for most stocks thus early in the morning. Aside from that, liquidity is low, with most equities only displaying stub quotes on stock exchanges, which makes it difficult to trade. Moving quotations are experienced by index-based exchange-traded funds (ETFs), such as the SPDR S&P 500 ETF (SPY), as a result of the trading in S&P 500 futures contracts. In the case of a substantial gap up or down in the S&P 500 futures, many of the most frequently held top positions in benchmark indexes may also see movement in the opposite direction. Large-capitalization, widely held equities such as Apple Inc. (AAPL) are known to see transactions as early as 4:15 a.m. Eastern Standard Time (EST).
After-hours trading was launched before the start of the regular trading day. By extending trading hours by one hour, the New York Stock Exchange (NYSE) became the first major stock exchange to provide after-hours trading. The move was made in response to rising competition from foreign exchanges in London and Tokyo, as well as private exchanges that provided additional trading hours. A total of 2.24 million shares were traded in two sessions of trading, indicating that the move was successful. 3 Over the years, as exchanges became increasingly computerized and the Internet’s reach expanded beyond national borders, the New York Stock Exchange (NYSE) began extending the number of trading hours available for trading, eventually allowing pre-market trading between the hours of 4 a.m. and 9:30 a.m., and after-hours trading until 9:30 a.m.
Trading Before the Market Opens
IMPORTANT TAKEAWAYS
• Pre-market trading is defined as trading that takes place between the hours of 4 a.m. and 9:30 a.m. EST.
• Pre-market trading is characterized by a lack of liquidity, low trading volumes, and wide bid-ask spreads, among other characteristics.
The Advantages of Pre-Market Trading
Pre-market trading and after-hours trading (together referred to as extended-hours trading) are comparable in terms of both advantages and hazards. First, let us consider the advantages:
• It provides a chance to respond to breaking news early in the morning: Pre-market news provides the retail investor with an opportunity to react to overnight news before the regular trading session begins, giving them a competitive advantage. Corporate results (although most businesses declare profits after the markets close rather than before the open) or a large company announcement, overnight breaking news such as a geopolitical event, or news emerging from international markets are examples of this kind of news. The caveat here is that the response to such news during the pre-market period may revert during the normal trading session. Due to the small trading volume in the pre-market, it is possible that a signal of weakness or strength may be generated that will not be confirmed after the market opens and normal trading volumes have been established. Suppose a company publishes disappointing profits. The stock may fall sharply in pre-market trading, but it might rebound in the main trading session and conclude the day higher in the final trading session.
• Trading at your convenience: This is a significant advantage for the do-it-yourself investor since not everyone has a schedule that allows them to trade during normal market hours. Because of the hectic pace of daily life, being able to start the day early and conduct trades in the pre-market is a significant benefit for the majority of individuals.
• To get a leg up on the competition, do one of the following: Astute traders and investors who are aware with trading trends and have prior expertise in extended-hours trading may be able to take advantage of the pre-market to purchase or sell stocks at a more advantageous price than those achieved by other traders during the normal trading day and hour. This is only conceivable if the pre-market response to news concerning a company is correct, and if the stock does not completely discount the news in pre-market trading before the stock opens for business. An equity that trades higher in the pre-market will continue to trend considerably higher during the regular trading session, while an equity that trades lower in the pre-market will trend down during the regular trading session.
What is the Nasdaq-100 Pre-Market Indicator and How Does It Work?
This indicator is derived based on the last sale of Nasdaq-100 shares during the pre-market trading period of 8:15 a.m. to 9:30 a.m. EST on the Nasdaq-100 stock exchange. It is calculated using the final selling price from the previous day’s 4 p.m. closing price for Nasdaq-100 equities that do not trade in the pre-market, according to the SEC. The Nasdaq-100 Pre-Market Indicator and the Nasdaq-100 After Hours Indicator are both valuable indicators of market mood as trading continues into the evening.