The Indian stock market opens up for trading at 9.15 AM and goes on until 3.30 PM. These are the regular trading hours during which investors and traders may place their buy and sell orders.
However, in 2010, the National Stock Exchange (NSE) came up with a unique concept known as pre-open market trading that allowed investors and traders to place buy and sell orders before the markets open up for regular trading.
Wish to know more about pre-market trading and its benefits? Here’s a comprehensive guide that can help you understand this unique concept.
What is Pre-Market Trading?
The National Stock Exchange in 2010 established a 15-minute window right before the Indian stock market opens up for regular trading. This session begins at 9.00 AM and lasts up until 9.15 AM and is referred to as the pre-market session. Pre-market trading is when buy and sell orders are placed on the exchange during this 15-minute window.
Although it was the NSE that brought about this concept, the Bombay Stock Exchange (BSE) also adopted it later on. The primary aim for bringing about pre-market trading was to help curb heavy volatility in the market and individual counters due to significant events or announcements that might have happened during the off-market hours.
During this 15-minute window, all of the buy and sell orders for the respective assets are matched with one another to determine the actual supply and demand. This information is then used to set the opening price of the asset. By closely following the pre-market movement of an asset, you can to a certain extent gauge the investor sentiment and the direction that the asset is likely to move during the day.
Why do people prefer pre-market trading?
Pre-market trading is preferred by many traders because it offers the opportunity to react to news and events that occur outside regular market hours. For instance, corporate earnings announcements, economic reports, or geopolitical developments often happen after the market has closed. By engaging in pre-market trading, investors can take advantage of these events to position themselves before the regular session begins. Additionally, pre-market trading can help investors set their positions based on global market trends, particularly if significant movements occur in international markets that might impact local stocks. This early access can provide a strategic advantage, allowing investors to potentially secure better prices before the broader market reacts.
Breakdown of the Pre-Market Trading Session
Segment 1: Order Placement (9.00 AM to 9.08 AM)
During this 8-minute segment of the pre-market trading session, you’re free to place buy and sell orders for all the segments and asset classes. Additionally, you can also cancel or modify orders that you placed during the segment.Segment 2: Order Matching (9.08 AM to 9.12 AM)
In this 4-minute segment, the stock exchanges confirm and match every buy order with a respective sell order. The opening price for the asset is then determined once the matching of orders is complete. During this segment, you cannot place any more orders or modify or cancel existing ones.Segment 3: Buffer (9.12 AM to 9.15 AM)
This short 3-minute session is a buffer window during which no major activity is undertaken by the stock exchanges. In the case of any abnormalities, however, stock exchanges use this 3-minute session to rectify them.
Benefits of Pre-Market Trading
Pre-market trading provides investors with a lot of advantages. Here’s an overview of a few of the key benefits.
Early-Mover Advantage
By taking part in pre-open market trading, you can effectively leverage significant news such as geopolitical developments and company earnings and announcements to your advantage. For instance, if a company announces favourable quarterly results during the off-market hours, you can place a buy order during the next day’s pre-market trading session and get a head start.Chances of Reversals
Generally, in many cases, the pre-market reaction to a piece of particular news may not bear fruit during regular trading hours. In fact, the market direction may even reverse once regular trading starts. You can use the point of reversal to your advantage and place trades accordingly. For instance, if a company declares a record loss during off-market hours, the pre-market reaction to its stock may be negative. However, during regular trading hours, the bearishness may slowly reverse and turn bullish. You can make use of such reversals to your advantage.Ideal for Investors with Limited Time
If you’re someone who has a tight work schedule and finds it difficult to place orders during regular market hours, the pre-market trading session may be perfect for you. You can place your orders during this window and carry on with the rest of your day.Stock Prices May Be Favourable
Pre-market sessions can help you enter into positions at prices that are more favourable than what you would get during regular trading sessions.
Pre-Market Trading Risks
Although pre-market trading comes with a host of benefits, there are some risks that you should be aware of as well.
Lower Liquidity:
Fewer buyers and sellers in the market can lead to lower liquidity, making it difficult to execute trades at desired prices.Higher Volatility:
Limited participation can result in significant price swings, where small trades can greatly impact the stock price.Wider Spreads:
The difference between bid and ask prices can be much wider, increasing the cost of trading.Price Discrepancies:
Prices during pre-market hours may not reflect the stock’s true value, as they are based on fewer transactions and can be easily influenced by minor news.Limited Information:
Not all news and data are available before the market opens, which can lead to less informed trading decisions.Potential for Manipulation:
The lower volume of trades can make it easier for prices to be manipulated by large orders from a few participants.Higher Risk of Loss:
The discrepancies between pre-market and regular market prices can lead to unexpected losses if the broader market does not support pre-market price movements.
Conclusion
Pre-market trading is a key session that can set the tone for the regular trading hours. However, the market may still reverse as the trading session slowly progresses. Since there’s always a bit of uncertainty and increased volatility with pre-open market sessions, trading during these periods is recommended only for experienced traders and investors.
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