Definition
The term pre-market stock trading refers to the exchange of shares on a market between the hours of 8:00 a.m. and 9:28 a.m. Eastern Standard Time. Pre-market trades include the buying and selling of shares at an agreed upon price, just like the trades that occur during regular market hours.
Explanation
Pre-market trading is one of two forms of extended hours trading, the other being after-hours trading. The development of electronic communication networks (ECN) meant investors no longer relied on manual intervention to trade stocks. ECNs allowed buyers and sellers to interact via electronic means both during regular trading hours as well as during extended hours.
Pre-market trading begins at 8:00 a.m. and ends at 9:28 a.m. Eastern Standard time (EST); just prior to the start of the market's normal operating hours. Note: Unlike after-hour trading, pre-market hours are not standardized. For example, Fidelity Investments allows trades as early as 7:00 a.m. EST, while other financial institutions might not permit their clients to trade in the pre-market hours.
During this time, the market functions in the same way it does during regular hours. Companies oftentimes release earnings reports before or after the market closes. Investors will participate in pre-market trading to take advantage of new information. That being said, there are a number of significant disadvantages associated with this approach, including:
Liquidity: since there are fewer investors participating in the pre-market, it is more difficult to sell shares at a fair price.
Spreads: lower trading volumes typically result in larger bid and ask prices, making it more difficult for an investor to have their order executed at the desired price.
Volatility: lower trading volumes will also result in larger price swings than those experienced during regular hours.
Related Terms
after-hours stock trading, regular trading hours
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