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.
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
The opening price may not be indicative. When the market opens for trading and more investors come into the trading rink, the premarketing price adjustment may still diverge.
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 the pre-market trading. Limit orders are instructions to sell or buy a stock at a particular price or higher. A market order is one where you can buy or sell right away at the current market price. Traders are not allowed transactions that are valid only for the pre-market session as that may encourage speculation.
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!
FAQs
What is Pre-Market Trading in the Indian Stock Market?
Pre-market trading refers to transactions that occur before the official opening hours of the stock market. This trading window is specifically designated to manage price volatility and allow early reactions to overnight news affecting stock prices.
How does Pre-Market Trading help in Price Discovery?
Pre-market trading helps establish an equilibrium opening price for stocks by reflecting overnight news and developments in the opening price. This helps in achieving a more stable and accurate price at the start of the official trading hours.
What are the risks associated with Pre-Market Trading?
Some of the risks involved in pre-market trading include poor liquidity, which can lead to difficulty in matching orders, and wider bid-ask spreads due to lower trading volumes compared to regular trading hours.
Who can participate in Pre-Market Trading sessions?
While pre-market sessions are open to almost all investors, not all trading accounts may have this feature enabled by default due to the higher volatility during these hours. Investors may need to request their brokers to activate this feature.
What types of orders are allowed during Pre-Market Trading?
During pre-market trading on Indian stock exchanges, both limit orders and market orders are permitted. Limit orders specify a price limit for buying or selling stocks, whereas market orders are executed immediately at the best available current market price.
