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The term pre-market trading refers to the practice of trading stocks, securities, and other financial instruments in markets prior to their official opening. Most national and international stock exchanges are open from Monday through Friday, for a specified number of trading hours each day. Stock and security trades made by individual investors typically take place during these times; however, pre-market trading has gradually increased in popularity since the 1980s. As a result, many investors are now seeking out opportunities to complete securities transactions while the markets are closed. Additionally, pre-market trading allows investors to react with buying or selling decisions based on breaking news events.
Types of stocks and securities that can be purchased and sold during pre-trading hours are not limited to specific classes of financial instruments. Stocks that would normally be available during regular trading hours can also be traded during pre-market time periods; however, because the financial markets are closed when pre-market trades are made, the trade is technically considered an order. Investors and brokers are able to state the highest and lowest price that they will accept for the purchase or sale of a stock. This is called a limit order and is a general requirement for pre-market trades.
Due to the light volumes in pre-market trading, limit orders can help ensure that prices remain fair for pre-market and regular market trading. Generally, many stocks traded during pre-market time periods are those of companies making headlines. Many investors habitually seek opportunities to get a jump start on the market based on news and earning reports that may have been released after or before regular market hours.
Pre-market trading was not originally intended for individual investors. The concept was first applied to larger institutions as a way to transfer large blocks of trades in an orderly fashion that would not disrupt the flow of the regular trading. As new technology has allowed more investors to gain access to market data, the popularity of pre-market trading has continued to rise. Brokerage firms can now make pre-market trade numbers available to customers in real time. This development, coupled with access to free Web sites offering similar services, has encouraged more individual investors to make decisions based upon pre-market fluctuations and news events.
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