Pre market trading is when investors trade stocks between 4:00am and 9:30am, during the week. Pre market trading (also known as extended hours trading) sees a very small percentage of the amount of stocks being traded, which means that an investor should consider more factors before buying.
Companies Make Announcements
Companies often avoid making important announcements during regular trading hours, since it could cause an enormous reaction and cause the actual value of their stock to be misrepresented by this. If a company were to announce its recent profits and they were not as good as shareholders were expecting, it could cause an enormous dropping of the stock and further losses resultantly.
However, pre market trading hours doesn’t mean that the value of a stock cannot move, and shareholders/investors will require access when said value changes, hence pre market sessions are important and useful. If an investor trades when an announcement is released, they are able to react to the new information more quickly without a great change in the stock prices. After the market has opened, share prices will have changed, meaning the stock prices will represent a more fair value., at which point it could be past the best time to make a trade.
Economic Indicators
A lot of economic indicators are released in the pre market trading time, 8:30am. The reaction of the market and its shareholders can cause considerable movements in stock price, and give an idea of what the rest of the trading day is going to be like. When data that is released does not meet expectations, or falls short of them, traders should be ready for market volatility.
Liquidity Limitations
Previously, the pre and after trading sessions used to be available for exclusively institutional investors, regular investors were not allowed access. This has changed however since the markets transferred to digital trading.
Since the pre market hours have less availability of liquid assets, it is more difficult to sell stock during these times. One must remember that if an announcement is made and is not good, and one wishes to sell their shares fast, it may not be possible, especially if the shares in question are for a small company.
Also, pre market and post market trading hours are traded in by most professionals and the volume is not high, meaning that price volatility could be considerably increased.
Reliability
When trading in the pre and post market hours, there could be more technology-related issues that investors will have to deal with. These could include long delays, and the possibility of orders not being executed whatsoever.
Should You Carry Out Pre Market Trading?
Pre market trading can provide advantages for traders that are trying to make money on news that they are expecting to hear, and it could also provide the possibility of entering into a new stock if news that is announced suggests it is a good idea to do so. However, it is recommended that one is a professional trader before entering these markets, since normal trading hours have far better liquidity and are generally much more efficient, meaning that prices are fairer all round.
