What is Pre-Market Trading? Find out here.

Although the stock market technically functions during business hours, you can still trade before the market opens. This is known as premarket trading, and it allows investors to purchase and sell equities before the market opens to the public. One of the main advantages of this sort of trading is that it allows investors to react to news and events that occur outside of normal business hours. Premarket trading, on the other hand, might be risky for beginner investors due to a small number of buyers and unpredictable pricing. Consider engaging with a financial advisor for aid with premarket trading and any other investing advice.

Premarket Stock Trading: What Is It and How Does It Work?

The pre-open market session was created by the NSE to reduce the volatility of equities at the daily market open. On the NSE, the pre-market trading period runs from 9:00 a.m. to 9:15 a.m. Traders can, however, buy and sell securities on electronic exchanges prior to the start of the regular trading day. There are no physical locations for these electronic exchanges. To put it another way, buyers and sellers communicate via a digital network.

Premarket trading is a relatively recent trend. The New York Stock Exchange (NYSE) responded to 24-hour global trade in 1991 by permitting trading after regular market hours. Since then, automated international trading has grown in popularity, and exchanges have expanded trading hours to include non-market hours. Trading is possible even after traditional markets have closed. On international exchanges, however, after-hours trading may continue until the next morning.

Premarket Trading Has Its Own Set of Risks

While trading may go up during premarket time, news and even rumor might widen the spread between bid and ask stock prices. Individual investors coordinated by prominent Reddit message boards drove up the prices of companies like GameStop Corp. (GME) and AMC Entertainment Holdings Inc. (AMC), for example, which were heavily featured in the press around the beginning of January 2021.

This compelled traders who had shorted the stock, or gambled that its price would decrease, to buy it in order to avoid suffering significant losses on their short holdings. As a result, a short squeeze developed, fueling the rush to buy additional stock and pushing prices even higher.

As squeeze trades lose steam, investors are watching these prices fall. Investors should be cautious when trading stocks during short squeezes, according to experts, and unpredictable prices might be dangerous for newcomers.

Keep in mind that prices in premarket trading can be significantly more erratic than usual. Because of the little volume, they can rise and fall more quickly and sharply than typical. Traders who are accustomed to more moderate trading may suffer big losses as a result of quick premarket price movements.

Worse, the prices of equities traded during premarket hours may differ from the pricing of those shares during normal hours. Premarket indicators can be deceiving. Stock prices may drop abruptly at the opening bell, even if they appear to be climbing during pre-market trade.

Because there are fewer trades in premarket trading, it may be difficult to identify a buyer or seller. This makes it harder to execute deals and determine prices. Premarket pricing movements should be viewed with caution. Only the most experienced traders should try trading before the open of the market.

Premarket vs Regular Trading

• Since there are fewer individual individuals trading during the premarket hours, competition is more severe. Individual investors may be at a big disadvantage compared to professional traders who have access to more data.
• If you and another investor are on distinct, incompatible ECNs, you may not be able to complete a trade. Meanwhile, a computer glitch at your brokerage can cause a deal to be slowed or even stopped entirely.
• Premarket trading, in general, follows a distinct set of restrictions than regular trading. Because different ECNs and brokerages have varied premarket trading rules, you should compare and contrast them.
• Limit orders are widely used by brokerage firms that deal in premarket trading. Trades are only completed when the stock hits the limit price or above when a limit order is in place.
• In the pre-market, time constraints are also frequent. If time-limited orders are not completed during premarket trading, they may be canceled. When regular trading hours begin, orders entered during premarket trading may be executed. Orders placed during regular trading hours may also be executed during after-hours or premarket trading sessions.

Wrapping Up

For experienced and educated investors, premarket trading can be a lucrative opportunity. It's also a lot riskier than trading during normal business hours. As a result, it's more customary for investors to observe rather than participate in premarket trading.

Individual investors will very certainly be pitted against professional investors with far more experience if they trade before the market starts. If you still find yourself drawn to early trading hours, having a professional on your side may be beneficial.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.