Definition
Pre-market is a term in finance that refers to the trading activity that occurs before the regular market trading hours begin. It’s a period of time in the early morning during which investors can trade securities, usually from 4 a.m. to 9:30 a.m. EST. The prices of securities traded during this time can provide insight into how the regular market may perform.
Key Takeaways
- Pre-market is a term used to refer to the trading activity that occurs before the regular market session opens. This is typically a time when traders can review the market and potentially place trades based on new information that has been released since the market closed the previous day.
- It generally occurs between 4:00 AM and 9:30 AM Eastern Standard Time in the U.S. During this time, both institutional investors and individual traders can buy and sell securities.
- The prices of securities traded in the pre-market session may significantly differ from the prices at which those same securities trade later in the regular session. The pre-market trading prices may be an indicator of the direction the security’s price may take once regular trading begins.
Importance
The finance term “Pre-Market” is important as it refers to the trading activity that occurs before the standard market session opens.
Investors use it as an indicator to gauge the market mood before the market opens.
It often reflects the impact of significant news reported when the market was closed, such as earnings reports, geopolitical events or changes in economic indicators.
This can give investors insight into expected price movements during the normal trading hours and thus, can help them make more informed investment decisions.
It’s key to note though that trading volumes in pre-market are generally lower and it can be less liquid, potentially leading to more price volatility.
Explanation
The primary purpose of pre-market trading is to provide an indication of where the market may be headed before the regular trading session begins. It is an opportunity for investors to react to news events such as earnings reports or significant economic events that occur outside of regular trading hours, providing a platform for trading that can potentially lead to a more accurate market opening.
In this respect, pre-market trading serves as a kind of temperature check on market sentiment. Pre-market trading is also widely used by institutional investors due to the flexibility it offers.
These large investors are able to execute large orders without impacting the market as heavily as they would during regular trading hours. Simultaneously, savvy individual investors use the pre-market session to get a head start on trades that could be advantageous based on overnight news or trends.
Nonetheless, the lower liquidity and higher volatility often associated with the pre-market should be considered when trading during these hours.
Examples of Pre-Market
Tesla Inc. Shares Update: On July 22, 2021, Tesla Inc. shares increased by
1% in the pre-market trading session following the company’s announcement of its second-quarter earnings on the previous day. Tesla had surpassed its earnings estimates, thus resulting in a positive outcome and rise of share prices in the pre-market session.
Pfizer Covid-19 Vaccine: When Pfizer initially announced promising results from their Covid-19 vaccine trials on November 9, 2020, their stock jumped about 15% in the pre-market trading session. This was due to investors’ anticipation of increased revenues and profits from the sale of the vaccine.
Apple Inc. Product Launch: Before the launch of the iPhone 12 on October 13, 2020, Apple Inc. shares witnessed a rise in pre-market trading due to the high anticipation and speculation over the success of the new models. Investors expected a strong revenue increase, which reflected in the company’s share price in the pre-market session.
FAQs on Pre-Market
What is Pre-Market trading?
Pre-Market trading refers to the buying and selling of stocks outside of the standard trading hours of 9:30 AM – 4:00 PM Eastern Standard Time (EST). Pre-Market trading typically occurs between 8:00 AM and 9:30 AM EST, though this can vary depending on the brokerage.
Why Trade in the Pre-Market?
Investors may choose to trade in the Pre-Market to take advantage of market opportunities that arise outside of regular trading hours, such as earnings reports, or significant news events that can affect a stock’s price. However, pre-market trading can be riskier due to often lower liquidity and higher volatility.
How does Pre-Market trading work?
Pre-market trades can be executed just like regular trades, but they must be placed within the pre-market session and likewise, cannot be canceled or changed outside of these hours. Not all brokerage firms offer pre-market trading, and those that do may require traders to opt into this service.
How are Pre-Market prices determined?
The pre-market prices reflect the supply and demand for the security in the over-the-counter market, which is influenced by news and other events occurring outside of the regular trading hours. This ensures that the prices are updated in real-time and the assets reflect their true economic value.
What are the risks of Pre-Market trading?
Some potential risks include less liquidity, wider bid-ask spreads, and more price volatility. This may make it more difficult to execute trades. It’s important for investors to understand these risks and consider them in their trading strategy.
Related Entrepreneurship Terms
- After-Hours Trading
- Trading Session
- Market Orders
- Limit Orders
- Extended Hours Trading
Sources for More Information
- Investopedia: An extensive resource for investing education, personal finance, market analysis and free trading simulators.
- MarketWatch: Provides the latest stock market, financial and business news. Also includes analysis of world markets.
- Bloomberg: An eminent source for global business and finance news, data, analysis, and video to the world.
- CNBC: Offers breaking news, real-time stock market coverage, and market and business analysis. Also features advice on personal finance and investing.
