Pre-market trading is a time period of trading activity before normal market hours. Pre-market trading begins as early as 4 am EST and goes until normal market hours, which begin at 9:30 am EST. Not all brokers offer this service to their retail clients. The ones that do often customize their pre-market trading service offerings. For example, they may offer pre-market trading only between 6 am to 9:30 am. Pre-market trading can only be conducted through Electronic Communication Networks (ECN) that match buy and sell orders electronically, instead of through a traditional stock exchange like the NYSE. Pre-market trades are processed as "same day" trades with settlement occurring three days after the actual date. The New York Stock Exchange (NYSE) introduced premarket trading in 1991. Earlier, the NYSE, Nasdaq, and other exchanges provided similar services using other technology services, such as SelectNet, Automated Confirmation Transaction Service, Nasdaq Trade Dissemination Service. After its introduction, the Pre-Market trading service was initially reserved for institutional investors and High Net Worth Investors (HNI). The development of ECN networks enabled deployment of the service to retail investors. It offers traders indicators for that day's regular sessions, including active trading stocks and overall market movement and direction. Pre-market trading is characterized by low levels of liquidity and volume and big "bid-ask spreads", or the difference between what buyers are willing to pay and sellers are willing to sell for. Large institutional firms are key players in pre-market trading. Preparing for pre-market trading involves checking several sources of information. Some of them are: While pre-market trading can offer clues to market movement, much depends on a trader's interpretation of available facts. Trading volume in pre-market trading is relatively thin as compared to the actual trading volume during regular sessions. The difference can magnify price swings, leading to a distorted view during pre-market trading. News developments during the day can further influence a stock's price trajectory and market direction. As such, pre-market moves may not always be indicative of the magnitude of a market move during a regular session and should be interpreted carefully. For example, consider the case of stock ABC. A news outlet reported that ABC, whose stock was sliding downward due to negative earnings outlook, was rumored to be an acquisition candidate for a major conglomerate. Its stock price quickly jumped by more than 15 percent in pre-market trading. The steep jump in its price was due to the lack of liquidity in pre-market trading. A trader might attempt to get in on the action by buying the stock at the inflated price, hoping that it will appreciate further as other traders join the party after market opening. However, after the markets launched trading for the daily, a second news report stated that the rumor was unfounded and ABC's price crashed, leaving the trader with losses. During normal market hours, the presence of liquidity and skeptical traders might have arrested ABC's stock jump or cut back the percentage figure of its increase. Limit orders are a useful tool for traders to curtail their losses. Such orders are not executed unless a price target specified by the trader is reached. You should check with your broker to see if they support limit orders during pre-market trading.Preparing for Pre-Market Trading
Using Pre-Market Signals for Trades
Pre-Market Trading FAQs
Pre-market trading is a time period of trading activity occurring before normal market hours.
The pre-market begins as early as 4 am EST and goes until normal market hours, which begin at 9:30 am.
Many investors observe pre-market activity in order to estimate the strength and direction of the market in anticipation of the regular trading session.
Generally there is less activity in the market during the pre-market session than during regular trading hours. During this time, the volume and liquidity of securities is fairly low. Large bid-ask spreads are common.
Pre-market moves may not always be indicative of the magnitude of a market move during a regular session and should be interpreted carefully.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
