Stock market trading is one of the most important financial sectors in the Indian economy. Stock trading involves selling and purchasing shares of publicly traded companies on stock exchanges.
The five main types of trading practices are day trading, algorithmic trading, scalp trading, position trading, and option trading. However, certain kinds of trading, like intraday trading and pre-market and after-market trading, are categorised based on time frames.
For instance, intraday trading is called so because the buying and selling of shares are done within the same day. Intraday trading time starts and ends on the same day. Therefore, the transactions occur within the trading hours of a single day.
Premarket stock trading and after-market stock trading are other forms of trading categorised on the basis of time frames. Shares are traded before and after the normal working hours of the stock market, respectively. If you are an early bird who wishes to invest in the stock market before others, this article is for you.
What is pre-market trading?
Introduced by the National Stock Exchange (NSE), pre-market trading is a 15-minute session available to investors before the market commences for the day. The trading hours of the Indian stock market function from 9:15 A.M. to 3:30 P.M. However, in pre-market stock trading, trading takes place between 9:00 A.M. and 9:15 A.M.
Also called pre-open session or pre-open trading, the market can open to a price defined by a genuine demand and supply of securities. In this case, the market price is not driven by prices set by the first trades of the open market.
Understanding pre-market trading
Currently, only NIFTY 50 stocks on the National Stock Exchange and SENSEX 30 stocks on the Bombay Stock Exchange are allowed to trade during the pre-market session. However, the timing between NSE and BSE is consistent.
Premarket stock trading is a 15-minute window that is divided into three sections. They are:
- Order entry session (9:00 A.M. to 9:08 A.M.): In this session, you can place orders to sell or purchase stocks. Modification and cancellations are also allowed.
- Order matching session (9:08 A.M. to 9:12 A.M.): You can confirm your orders, match your orders, and calculate the open price for the rest of the day. No buying, selling, ordering, or cancelling is allowed at this stage
Buffer session (9:12 A.M. to 9:15 A.M.): This session is created to address any kind of anomalies in the previous sessions. The period facilitates the transition from pre-open to the conventional market session.
Pre-market stock trading starts your trading process before the conventional market hours begin. Here are a few points on how pre-market stock trading works:
- Traders utilise pre-market movements as indicators of potential market behaviour.
- This movement is governed by the performance of a company over the night, i.e., after the market shuts.
- The performance of the stock is also driven by fresh asset-related information such as corporate revenue announcements, fiscal policy alterations, and the release of economic data.
Basically, pre-market trading rides on financial information released by companies after the market closes and before the regular working hours commence on the following day.
How to trade pre-market and after hours?
Whether you are trading before the market opens or after it shuts, the procedure remains the same. Moreover, the procedure is similar to regular market working hours. The steps are as follows:
- Access your online brokerage account.
- Select the shares you want to trade.
- Select limited order and not market order.
Consider all the rules pertaining to varying trading hours across different brokerages.
Pros and cons of pre-market trading?
Here is a carefully curated list of pros and cons of pre-market stock trading for those who wish to embark on this journey.
Pros
- Competitive edge: Investors who start their day early get a jump start. These traders get an edge over the others as they are active before the market opens properly.
- Convenient trading method: Traders who indulge in pre-market trading are more active during the night. Therefore, they can adjust their investment strategies before the trading hours start.
- Reaction to overnight news: Premarket trading enables traders to respond to significant market changes promptly and safeguard their investments.
- Suits investors with limited time: If you follow strict 9 to 5 work hours and do not have the time to invest in the stock market, pre-market trading is the best option for you.
Cons
- High risk and uncertainty: The risk factor is high due to increased price swings. Trading before regular hours can lead to unexpected outcomes as the market sentiment might change once the share market opens.
- Low liquidity levels: Pre-market stock trading has a low liquidity level. This can impact trade execution and adversely affect the stability of the stock prices. The pace of activity can be slow as not all companies are participating.
- Tight constraints: Premarket traders have a different set of guidelines and regulations. Also, the bid-ask spread is wide because the number of participants is less. A vast gap can exist between buying and selling prices.
- Limited options: Not all stocks are available for trading, as companies have to meet certain criteria to trade before the market opens. NSE allows only a few companies to trade before the market opens.
The bottom line
Set your priorities right before you decide to do pre-market stock trading. Understand the risks associated with it and ensure that the benefits align with investment objectives. Analysing your ultimate financial goal and having a concrete investment plan is a must. So, choose pre-market trading only after you have analysed your finances and if the pros outweigh the cons.
