What is pre-market trading?

 

 

The stock market is open for business during specified hours. The Indian stock market is open for trade from 9:15 AM to 3:30 PM. The Indian markets, however, open for a pre-open trading session from 9:00 to 9:15 a.m. Pre-market, also known as the 15-minute pre-open session, was introduced by the NSE, the National Stock Exchange, in 2010. When the market opens, there is less price volatility thanks to the pre-market session. Pre-market trading allows the market to open to a price determined by a real supply and demand for the securities, as opposed to the market price being determined by the pricing of the first open market trades. It is possible to place, modify, or cancel orders during this brief window of time.

 

Did you know that you can trade even after market hours? Come read this blog to learn more about “What is after-market trading?”.

What is pre-market trading?

As the name implies, pre-market trading refers to all trades that take place prior to trading hours. Allowing traders to purchase or sell stocks before the markets are are open to the public may appear contradictory. However, it enhances open-price discovery and offers a significant operational benefit.

What are the advantages of pre-market trading?

Reduces volatility: By establishing the true supply and demand for the shares, the session aids in the stabilisation of share prices across the board for different firms. The equilibrium price is chosen throughout the process of figuring out supply and demand. Because transactions and prices are determined independently of trends, this promotes stability.

Finding the open price: Financial news can influence traders’ investment decisions even when the market is closed for trading. During the post-market hours, a lot of corporations reveal their financial results or other company news. The influence of these changes can be reflected in the opening price through pre-market trading.

The starting price is determined by the equilibrium price: The justification offered by the National Stock Exchange for allowing pre-market trading in 2010 was that it would allow supply and demand for the security to determine a stock’s opening price instead of the rate at which the first trade is resolved.

Impact of news: Pre-market trading causes the opening price to reflect the impact of all news that may have an impact on stock prices.

Break-Up of the Pre-Open Market Session

The pre-open market session lasts for fifteen minutes, and is divided into three smaller sessions:

Order Entry Session – 9 AM -9:08 AM

The tasks completed during this session are as follows:

Placing orders (buy or sale)

Modifying the placed orders

Order Matching Session – 9:08 AM – 9:12 AM

The following tasks are undertaken during this session are as follows:

The orders that are placed during the Order Entry Session are matched and confirmed in the Order Matching Session.

The opening prices of the stocks are also calculated in this session.

Buffer Session– 9:12 AM to 9:15 AM 

This period helps make the switch from pre-trading to market execution easier

What are the risks involved in pre–market?

The following risks are related to pre-market trading:

• As the trading volumes are considerably low in the pre-trading session, order matching may seem difficult for certain trades.
• In addition, lower trading volume could indicate a wider disparity between the offer and purchase prices.
• The initial pricing might not be representative. The premarketing price adjustment may still differ when the market starts for tradingk, and more investors enter the trading rink.

What kind of trades are allowed in the pre-market session?

In pre-market trading, Indian stock exchanges accept both market and limit orders. Limit orders are directives to purchase or sell a stock at a specific price or above it. You can purchase or sell at the current market price immediately upon placing a market order. Transactions valid solely for the pre-market session are prohibited for traders as they may stimulate speculation.

 

Currently, the exchanges have only allowed trading in the Pre-open market session for NIFTY 50 and SENSEX 30 stocks at NSE and BSE, respectively. The BSE and NSE pre-open market timings are the same. The pre-open market session will continue to feature stocks that are either included or excluded from the NIFTY or SENSEX indices