Pre Market Trading Meaning and Insights on Market Trends

We all know that the stock market has fixed operation hours. If we are to give you the timings of the Indian market, the trading hours basically start at 9.15 a.m. and end by 3.30 p.m. 

However, back in 2010, the NSE, which is known as the National Stock Exchange, introduced a 15-minute session before trading. It is known as pre-market trading. 

The pre-market stock trading session aims to decrease price volatility at the time of market opening. With pre-market trading, the marketplace may open to a value established by demand for supplies and genuine supply rather than the market value being driven by the price established by the first trades of the open market. 

Understanding Pre-market trading

Before we tell you how to trade in the pre-open market, let us understand what it is. The activity of pre-market trading typically has limited liquidity and volume. Therefore, large bid-ask spreads are very common. 

The majority of retail brokers grant pre-market trading. However, it can restrict the kinds of orders that may be made during that period. Various brokers that have direct access to market trading start as early as 4 a.m. EST, Monday to Friday.

It is important to remember that there is very little activity for stocks early in the morning unless there is news. The liquidity is very thin, with the majority of the stocks only showing sub-quotes. 

The exchange-traded funds that are index-focused have moving quotes because of the trading in the future contacts. The majority of the widely-held top holdings in benchmark indices may also get a movement in the event of a massive gap up or down.

Even after-hours trading was introduced after the pre-market trading. The NYSE introduced after-hours trading back in 1991. They did it by extending the trading window to one hour. 

The move was basically a reply to increased competition from international exchanges. It was especially in Tokyo and London, as well as private exchanges, which offered many hours of trading.

What are the NSE and BSE’s pre- and post-market sessions and orders?

Pre-market trading hours are restricted to the equity segment. They were created to reduce volatility. Additionally, they were there to find the opening values of securities during each day’s market opening. On the NSE and BSE, it takes place from 9:00 a.m. to 9:15 a.m.

For the first eight minutes of the pre-market session, from 9:00 a.m. to 9:08 a.m., orders are gathered, altered, or canceled by the exchange. During the pre-market session’s order collection window, clients may place market or limit orders. 

Between 9:07 and 9:08 a.m., the order collection window may close at any time. After the order-gathering window closes, trades are confirmed once the placed orders match. 

Open from 3:40 p.m. to 4:00 p.m., the post-market or closing session is limited to market orders. Post-market orders are limited to the stock segment, much like pre-market orders.

Clients may use the CNC product code at the market price to make buy or sell orders in the equities delivery segment during the post-closing session. The order will be put on the exchange at the closing price if it is placed as a market order.

Advantages of Pre market trading

It is vital that you know how to participate in pre-market trading. However, it is more important that you know some of the pros of pre-market trading:

• There are occurrences when the initial reaction of the overall market to a news release goes against the interpretation and long-term outlook of the stock. If you take part in the pre-market session, you might be able to take advantage of a big price change. While there is a possibility that a pre-market value might stick, it may also disappear by the time the market fully digests the news when it reopens. 
• If an organization’s news release leaves you under the impression that a stock is a screaming buy or sell, you might not want to wait around until the market opens. The value could be way worse by then. The pre-market enables you to get in early ahead of many investors. 
• If you are unable to place traders during the workday, which corresponds with normal trading hours, you may interested in using pre-market or after-hours trading to execute your trades. 

Drawbacks of Pre market trading

Here are some of the drawbacks of pre-market trading that you need to know:

• Your order is sent only to the electronic communications network that your broker employs when you place one for pre-market trading. The orders you can match with may be limited by the ECNs that other brokers and institutional traders utilize. Trades are carried out on the exchanges during regular business hours. The brokers combine orders from market makers and ECNs as well as other trading venues to guarantee you receive the best deal.
• The bid-ask spread might be significantly larger during the pre-market session than it is during regular trading hours. This is because of the lower number of participants. As a result, it could be challenging for investors to determine the true market price when putting in orders.
• The proportion of investors who engage in pre-market trading is quite low. Even with the increase in that figure following a major news release from a corporation, the market still has little liquidity. The fact that your broker can only access one ECN makes that worse. Because there aren’t enough shares trading hands, there’s a higher chance that your trade will never execute.
• One important warning is that during regular trading hours, the pre-market response to the news could turn around. When regular trading hours begin, and the typical trade volumes are attained, the low trading volume during pre-market hours may indicate weakness or strength that is not always confirmed. For example, a stock that announces a miss on earnings could not trade much in pre-market hours, but it might turn around and close higher at the end of the regular session.

Wrapping Up

Sometimes, the stock brokers will not consider activating this option in your trading account as standard as they do not want a bunch of new traders trading in the post and pre-market sessions when volatility is a lot higher due to low volume. 

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