Understanding pre-open market session
The pre-open market session refers to the period before the regular market hours begin, during which the trading of securities takes place. It is a time when market participants, such as traders and investors, can place orders for securities that will be executed when the regular market opens. During this session, the prices and volumes of securities can be more volatile and less liquid than during regular market hours. This is because of less trading activity and liquidity in the market during this time, which can lead to wider bid-ask spreads and greater price fluctuations.
The pre-market open session is of short duration, typically lasting for 15-30 minutes. The window can be useful for market participants who want to make trades before the regular market opens. But, it can also be riskier due to the increased volatility and low liquidity. Some investors may prefer to avoid the pre-open market session and wait for the regular market hours to begin before making trades. However, for those who can stomach increased risk and volatility, the pre-open market session can be an opportunity to gain an advantage in the market.
What are the benefits of a pre-open market session?
Here are some of the benefits of the pre-open market session.
Convenient
Many investors who have day jobs may not have time to during regular market hours. Such individuals can make use of this window to place their trades.
Getting an edge on the competition
During the pre-market session, clever traders and investors who are familiar with trading patterns and have experience with extended-hours trading may buy or sell stocks at a discount to the typical session price. However, this is possible only if the stock does not entirely discount the information in the pre-open market trading and the pre-open market reaction to the information is accurate. If a stock is trading higher in pre-market open trading, it will likely continue to trend higher during the regular trading session. Conversely, if it is trading lower, it might continue to trend down throughout the trading day.
Offers a chance to respond quickly to breaking news
The pre-open stock trading session is often the phase when significant news or updates break. Investors can process this information before they begin trading, enabling them to plan deals that might lead to a profit. Traders can avail the first-mover advantage in this situation.
What are the risks of pre-open market session?
Now, we will discuss some of the downsides of pre-market sessions.
Poor liquidity
Unlike regular trading hours that see the participation of many traders and investors, the pre-market session witnesses a much lower volume of stock purchases and sales transactions. Hence, the amount of money traded pre-market is often a small portion of what is traded during the main session. Due to the low amount of trades, there is less liquidity, leading to higher volatility levels and wider bid-ask spreads.
Price uncertainties
The pre-market price of a stock may be quite different from its market price later in the day. Pre-market stock prices might only reflect prices from one or a small number of electronic communication networks (ECNs). During normal trading hours, traders will have access to stock prices provided by several exchanges and ECNs, allowing for more efficient price discovery.
Conclusion
The pre-open market session in the stock market is the period before the regular market hours begin. The session can be useful for market participants looking to make trades before the regular market opens. However, it can also be riskier due to the increased volatility and decreased liquidity.
FAQs
What is a pre-open session in the stock market?
The pre-open session is a trading period before the regular market session, lasting 15 minutes. It helps stabilize stock prices by discovering demand and supply, minimizing volatility.
Can I buy shares in the pre-open session?
Yes, you can place buy orders in the pre-open session. During this period, orders are collected, modified, or canceled, allowing traders to participate before the regular session.
Is it better to buy pre-market or at open?
Buying during the regular market hours is often advised, providing more liquidity and less volatility. Pre-market trading carries risks due to limited liquidity and wider bid-ask spreads.
How long is pre-market open?
The pre-market session is open for 15 minutes, from 9:00 AM to 9:15 AM on both NSE and BSE, allowing traders to place orders before the regular market opens.
What are the benefits of pre-open market?
Pre-open market reduces price volatility at the market opening, allowing for an orderly start. It helps establish an equilibrium price, aiding in more informed trading decisions.
