What is Pre-Market Trading? Benefits, Eligibility & How It Works

Did you know trading is 100% safe, even online? As a novice investor, it's time to expand your horizon if you've often chosen the more conservative route to grow your money. The stock market is so much more than what you see in movies. From transitioning as a gamble for high-risk appetite investors into a game of probability for a homemaker minting her side income, the stock market works seamlessly.So, if you are new to the world of stock markets, let's delve into pre-market trading and why it happens. Started as a routine practice by the NSE and BSE in October 2010, pre-market sessions happen before the market opens. It is relevant when the floating merger rumours, company acquisitions, delisting of stocks, and other similar volatile announcements flood the market. Pre-market trading works as a regular session in the absence of such events.These sessions take place between 9 AM and 9:15 AM. For a beginner, these 15 minutes make no difference, but ace investors use this session to judge the strength of the market. It helps make anticipatory investment decisions for a regular trading session that precedes the event. Read More : The difference between a stock market and a stock exchange.

Stock market exchanges have specific operation hours for investors to buy and sell stocks. But you can still make trades before the market opens. Buying and selling stocks before market hours is called pre-market trading. Although it is a risky 15-minute window for novice investors, this trading method allows investors time to react to off-hour events and news.The transactions occur through an automated system that assesses the demand and supply of stocks to establish an opening price. The session has extremely thin liquidity and low trading volumes.

Many factors influence a trader's decision. You know that a pre-open market session lasts 15 minutes, allowing the routine market to stay less volatile.

• Pre-open market session timings:

• Request an order to buy or sell stocks
• Cancel an existing order

• Order confirmation and matching of orders placed initially
• Calculating the opening stock price using the Equilibrium price determination method for the regular market session from 9:15 AM

1. Order entry session This session lasts from 9 AM to 9:08 AM, and here's what happens in the initial eight minutes:
2. No modification or cancellation of stocks can take place after 9:08 AM.
3. Order matching session A four-minute session, which lasts from 9:08 AM to 9:12 AM, no buying or selling of stock is allowed. However, you can undertake the below activities:
4. Buffer session The remaining three minutes, from 9:12 AM to 9:15 AM, is called the Buffer session. As the name suggests, this buffer time addresses any queries from the previous sessions. It facilitates a smooth transition from the pre-open to the regular trading session.

Pre-market stock trading eliminates the need for third-party involvement and brokers. An automated ECN, Electronic Communication Network, is a flexible mechanism allowing your active participation on days you cannot make transactions during regular market times.The ECN system tracks orders and matches relevant buyers and sellers looking to trade securities in the market. The system ensures anonymity and provides a wider spread than traditional brokers. So why do we need brokers during regular trading hours? Regular trading sessions in a financial market see a very high influx of volume and liquidity. An automated system like the ECN makes calculating break-even and stop-loss points tedious for some investors. Traditional brokers work best in a busy market session for investors who need help using live trading platforms.

Anyone can access pre-market trading sessions. If your broker has not activated the feature in your trading account, you cannot buy, sell, or modify your stocks during the pre-open session. Stock brokers often resort to such practices to reduce the number of new traders in pre- and post-open trading sessions, as volatility is higher than stock volume. In this case, contact your broker to activate the account.Only listed stocks trade during the pre-market session. Trade via exchange or as a subscription to any upcoming IPO. The takeaway from a pre-market trading session is to plan your trades and grasp the opportunity before the market opens.

The participation window in a pre-market trading session is small. Here are the two types of buying and selling orders one can place in the share market:

Market order

Market orders are when you do not specify the price. You want a fixed quantity of shares and confirm the order at the prevailing market price. The order is complete, and you get your shares.

• Limit order

A limit order is when you want to purchase or sell some shares at a defined price. You can place an order only during the pre-market trading window, but it is executed if the share prices reach your specific price.

The opening price of the shares is established using the equilibrium price calculation or call auction.

The role of demand and supply play a crucial role in determining the opening price of the stock. XYZ company's equilibrium price per share is ₹ 202 because the maximum volume tradeable is the highest for this value. If your order remains unexecuted in this window, it is considered during the regular market session.

The pre-market trading session has its benefits:

• It allows reacting earlier than other traders to overnight news. You have the leverage to plan your trading decision before the regular session commences. The red flag of this opportunity is that major company announcements or geopolitical developments can stir a reverse reaction in the regular session.
• If you are a sole player, trading early makes it easy to manage your schedule. If you have a busy work schedule that does not allow you to invest your time during regular market hours, a 15-minute is the perfect advantage you need to make your trade for the day.
• Seasoned investors and traders often use pre-market time to buy and sell stocks at a more favourable rate, compared to what others offer during a regular session, subject to the fact that market reaction to stock news is accurate. Usually, stocks that trade higher in a pre-market continue higher in a regular session, and lower stocks trade even lower. It’s your call to make to get ahead of the competition.

Like any other investment, pre-market trading is also subject to risk. The 15-minute window looks adventurous on the outside, offers lucrative benefits, and gives a panoramic view of the market stock prices beforehand. However, these sessions are an uneven playground for novice investors.

• With far fewer buyers and sellers than in a regular market session, low trading volumes result in greater volatility.
• Stock prices in a pre-market can differ significantly from those in regular sessions. There is a fair chance that better price discovery and multiple exchanges during regular trading hours will get you a better bid across all platforms.
• The benefit of pre-market trading is to safeguard yourself from adverse price changes during regular sessions. But in a limited order, your trade may not get executed.
• Stock trading is a game played by both seasoned institutional traders and retail traders. The former has an edge over others with more timely information and deeper pockets.

It is advisable to divulge in a pre-open trading session after you gain experience in the traditional trading market. Learn more about OTC market trading here for an in-depth knowledge of stock market investments.