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Pre-Market

Definition

The financial term “Pre-Market” refers to the trading activity that occurs before the regular market session begins in the stock exchange. It typically occurs between 4:00 a.m. to 9:30 a.m. EST in the U.S. During this period, investors can trade securities, but volumes are generally much lower than during regular trading hours.

Phonetic

The phonetic spelling for “Pre-Market” would be: “pree-mahr-ket”: /priːˈmɑːrkɪt/

Key Takeaways

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  1. Pre-Market refers to the trading activity that occurs before the regular market session opens. It usually takes place between 4:00 AM and 9:30 AM EST, though this can vary based on the exchange.

  2. Trading during the pre-market session can provide insights into the market sentiment before the official opening. It is also typically less liquid than regular trading hours, which can lead to more volatility and wider bid-ask spreads.

  3. Investors might use pre-market trading to react to news released outside of regular trading hours. However, because there are fewer participants, prices can move significantly, which can either lead to potential opportunities or increased risk.

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Importance

The Pre-Market term in business/finance is important as it refers to the trading activity that occurs before the standard market session opens. It gives investors an indication of the market sentiment towards a particular security or the market as a whole, based on economic indicators, company news, or significant world events. It can provide insights into potential price movements during the regular trading day, and therefore, can play a critical role in investment decisions. As it operates outside of traditional trading hours, it also extends the opportunity for trading, enabling investors to react promptly to breaking news and potentially capitalize on this information.

Explanation

The concept of Pre-Market is an integral part of stock exchanges, serving as a mechanism that assesses market sentiment before the regular trading hours commence. It is utilized for a multitude of reasons. One of the main purposes of pre-market sessions is to allow traders and investors to react to significant news events that occur outside of regular trading hours. Notably, many companies choose to release earnings reports and other significant announcements immediately after regular trading hours or before they commence. This strategy can help prevent drastic market reactions. Pre-market enables investors to react swiftly to these announcements, thereby potentially capitalizing on bold price movements.Furthermore, pre-market trading can serve as a barometer for the regular session’s trend direction. Volatility in pre-market sessions – triggered by buying or selling pressures – can provide early indications of the market’s sentiment towards specific stocks or the economy as a whole. Nevertheless, pre-market trading is typically associated with more risk compared to regular hours due to less liquidity and higher volatility. Yet, for some sophisticated and institutional investors, pre-market sessions represent a strategic opportunity for portfolio adjustments and potential profit in response to off-hour news.

Examples

1. **Apple Inc.**: Before the release of a new iPhone model, the pre-market trading of Apple Inc.’s stocks becomes very active. Investors are eager to buy or sell shares based on the speculated success or failure of the new product. The pre-market trading data can provide important insights to investors about the potential market reaction on the official trading hours.2. **Starbucks Corporation**: Suppose Starbucks Corporation releases its quarterly earnings report, showing higher profits than expected after the market has closed. The company’s stocks may see a surge in buying orders in the pre-market session next morning, as investors anticipate a bullish run when the regular market opens.3. **Pfizer Inc.**: In November 2020, when Pfizer announced their Covid-19 vaccine’s effectiveness, its stock saw significant movement in the pre-market trading. Investors, reacting to the positive news, rushed to buy the stocks before the regular market session, leading to a substantial increase in the company’s stock price.

Frequently Asked Questions(FAQ)

What is Pre-Market?

Pre-Market refers to trading activity that occurs before the regular market session opens. It typically begins at 4:00 am and continues until the market officially opens at 9:30 am (EST).

Why is Pre-Market trading important?

Pre-Market trading allows investors to react quickly to major events, such as earnings reports or significant world news that occur outside regular market hours.

Who can trade in the Pre-Market?

While Pre-Market trading was once only available to institutional investors, today, almost all brokers offer Pre-Market trading to retail investors as well.

Is there a difference between the prices in Pre-Market and regular trading hours?

Due to reduced liquidity, wider spreads, and increased volatility, prices in Pre-Market trading can be very different from prices in the regular market.

What are the risks of trading in the Pre-Market?

The risks include less liquidity, wide spreads, and more volatility. This means that the price at which one might be able to buy or sell a security can move significantly in a short time, potentially leading to substantial losses.

Can I cancel a trade during Pre-Market hours?

Yes, you can typically cancel a trade during pre-market hours. However, policies can vary between brokers, so it’s important to check with your broker for specific guidelines.

How can I access Pre-Market data?

Access to Pre-Market data depends on the brokerage platform you use. Many online platforms and financial news outlets provide real-time access to Pre-Market data.

Does trading activity in the Pre-Market session influence the opening price of a stock?

Yes, trading activity during the Pre-Market session can influence the opening price of a stock. If significant trading activity occurs, it can create a gap between the previous closing price and the opening price, either up or down.

Related Finance Terms

  • Extended-Hours Trading: This term refers to stock trading that happens either before or after the regular trading hours (RTH) of a stock exchange.
  • Stock Futures: These are contractual agreements that allow a buyer to purchase shares of a stock at a set price on a future date.
  • Opening Price: The price at which a security first trades upon the opening of an exchange on a trading day.
  • Volatility: This term refers to the degree of variation in the trading price of a security over a certain period of time.
  • Trading Volume: The measure of the number of shares or contracts traded in a security or an entire market during a given period.

Sources for More Information

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