What is pre-market trading?

Definition and examples of pre-market trading

How pre-market trading works

Advantages and disadvantages of pre-market trading

What does it mean for the average investor

Definition and examples of pre-market trading

Pre-market trading means when investors make trades before the opening bell, which in the United States is at 9:30 AM Eastern Time for major exchanges. With pre-market trading, trading occurs after the market closes at 4 PM, and it is part of trading outside of regular hours.

How pre-market trading works

Trading in the pre-market session is done solely through electronic trading systems. Market makers and specialists typically do not participate in this session, which is the main difference from trading in the regular session. Electronic trading systems display orders and match them directly between buyers and sellers. If there is no demand match, some stocks will not be bought or sold, or the investor may agree to pay a higher price to buy or a lower price to sell.

Advantages and disadvantages of pre-market trading

The difference between pre-market trading and regular session trading involves more than just timing. Here are some advantages and disadvantages to consider regarding trading outside of regular hours.

Advantages:

Convenient trading times: Not everyone is able to place orders during regular trading sessions. Pre-market trading occurs before the regular trading session begins.

Responding to early morning news events: Government reports and other news events that impact the markets are often released before the regular session opens. For example, the U.S. Bureau of Labor Statistics releases its monthly report at 8:30 AM Eastern Time. Many public companies release their financial reports outside of regular trading hours.

Disadvantages:

Lack of trading liquidity: During the pre-market trading session, the trading volume is lower, and there is less competition. In some cases, there may not be buyers or sellers to fulfill an order.

No obligation to obtain the best price: During the regular trading session, securities brokers are required to obtain the best available price for the order. However, brokers have no obligation to obtain the best price in the pre-market trading session. The price you get in pre-market trading can differ significantly from the price in the regular trading session.

Professional competition: Many traders in the pre-market trading session are professionals, having more experience and information than the average investor.

What does it mean for the average investor

If your investment strategy involves active trading, the pre-market trading session offers the ability to respond to news and events before the regular session opens, providing the opportunity to capitalize on those opportunities. However, if your strategy focuses on long-term performance rather than trading, the additional risks of the pre-market trading session may not be worth it.

Summary of key points: Pre-market trading means trading before the market opens, which is usually at 9:30 AM Eastern Time for major exchanges. The pre-market trading session provides the opportunity to respond to news and events faster than in the regular trading session. Investor protection in the pre-market trading session is not the same as in the regular trading session. Prices available from electronic communication networks (ECNs) used by brokers can vary significantly. Therefore, you may not receive the best available price.

Source: https://www.thebalancemoney.com/what-is-pre-market-trading-5220885