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Did you know, you can trade before the stock markets officially open? Since 2010, the National Stock Exchange (NSE) has allowed for a 15 minute pre-market or pre-open session. This helps to reduce price volatility right at the opening of the market. The market can then open at a price set by genuine supply and demand for security instead of being driven by the price set by the first trade.
Key Takeaways
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Pre-market trading in India takes place between 9:00 and 9:15 a.m., before regular market hours.
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It assists in determining the opening price by matching demand and supply rather than the initial deal.
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The session mitigates initial volatility induced by overnight news or business announcements.
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Liquidity is lower than typical hours, which can lead to greater bid-ask spreads and price volatility.
What Is Pre-Market Trading?
Pre-market trading is all the trades that happen before the trading hours, as the terminology suggests. This may seem counterintuitive to allow traders to buy or sell securities before the markets open for trading for everyone. But it has a substantial operational benefit, and it improves open-price discovery.
What Are the Timings of Pre-Market Trading?
The pre-market session has a running time of 15 minutes before the opening time of the Indian Stock Market. The pre-market session in India runs from 9 AM to 9.15 AM, as the trading hours start at 9:15 AM and end at 3:30 PM in the Indian Stock Exchanges. This pre-market session helps in stabilising the volatility and abnormal movements due to major events or announcements. The timings of the pre-open market are the same for National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
What Are the Advantages of Pre-Market Trading?
- Discovering open price:Even when the market is shut for trading, financial news can affect the investing decisions of traders. Many companies release their financial results or other company news in the post-market hours. Pre-market trading allows for the impact of these developments to be reflected in the opening price.
- The opening price based on equilibrium price: When the National Stock Exchange allowed pre-market trading in 2010, the argument made in its favour was, it will enable the opening price of a stock to be decided by the demand and supply for the security rather than the rate at which the first trade gets settled.
- Minimises volatility: Pre-market trading reduces volatility in opening prices of securities.
- Impact of news: The effect of all the news that can potentially affect stock prices gets reflected in the opening price because of pre-market trading.
Are There Any Risks to Pre-Market Trading?
- Poor liquidity:The trading volumes may be low in the pre-market session. Order matching for some trades may be difficult in that case.
- Wider buy-ask spread: Lower trading volume may also mean that the spread between the buy and ask prices may be more extensive than in regular trading hours.
- Price uncertainties remain: This is the order entry session. During these 8 minutes, investors can place, modify, or cancel their orders. The system accepts these orders but does not execute them yet. This is the only time window where you can actively modify your positions before the matching process begins.
What Does the Pre-Market Session Involve?
The pre-market session on, National Stock Exchange, for example, runs from 9 AM to 9.15 AM. In these 15 minutes, the first eight minutes are dedicated to order collection, entry, modification, and cancellations. The next seven minutes are for matching orders, confirming trades and making a smooth transition into regular market hours.
Example Let us understand pre-market trading with a hypothetical scenario: [The timing for pre-market trading is from 9 AM to 9.15 AM. We break down this timing into the following time slots.]
- 9:00 AM to 9:08 AM
This is the initiation time for the stock market transactions. The orders that are placed in this time slot are prioritised at the beginning of actual trading. The investors get the flexibility to modify or cancel their requests during this time. After this initial 8-minute window in the pre-opening session, no further orders can be placed.
- 9:08 AM to 9:12 AM
This time slot is considered to be crucial for setting the price of a security. The process involves aligning demand and supply prices through a price-matching order to ensure precise transactions between investors looking to buy or sell securities. The multilateral order matching system is used to establish final trading prices during the Indian Stock Market hours. This system helps in determining the security prices during the normal trading session. Here, unlike the prior time slot, modifications for the placed orders are not permitted in this session.
- 9:12 AM to 9:15 AM
This is the final time slot, bridging the pre-opening period with the regular trading hours of the Indian Stock Market. No new orders are allowed to be submitted in this session. Moreover, the trades placed already cannot be revoked or modified either. The end of this time slot also marks the end of the pre-market trading session. Here, the normal trading hours begin.
What Type of Trades Is Allowed in Pre-Market Trading?
Indian stock exchanges allow limit and market orders in pre-market trading.
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Limit Orders: These are instructions to buy at a specific price (or lower) or sell at a specific price (or higher).
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Market Orders: These allow you to buy or sell at the final equilibrium price determined by the exchange.
Note: Unlike regular market hours, pre-market orders are not executed immediately. They are collected during the first 8 minutes and then matched simultaneously at the discovered opening price.
Who Can Trade in the Premarket Session?
Pre-market trading sessions are available for almost any investor. Sometimes, your trading account might not have the feature of pre-market trading. This happens primarily because the pre-market sessions have a higher volatility rate and the brokers do not encourage a beginner to dive directly into pre-market trading without any information. If you wish to activate this feature, you can contact your trader and get the facility availed. However, before investing, always consider your risk tolerance and carry out in-depth analysis to make informed decisions. If you do not have a Demat account to start investing, consider opening on with Angel One. We offer a user-friendly platform that enables you to manage your portfolio with one account. Get investing with Angel One!
Conclusion
Pre-market trading assists in determining a fair opening price for securities, which contributes to an orderly start to the trading day. By incorporating overnight news and developments, it eliminates significant price changes at market open. However, due to lesser liquidity and higher spreads, prices may still fluctuate until regular trading resumes. Understanding how the pre-market session operates can assist market players in better interpreting opening prices and managing expectations while trading during early market hours.