Pre-market refers to any type of trading activity that takes place before the formal opening of the marketplace in the morning. This type of trading process has become increasingly popular, in part due to the ease of using some type of electronic communication network, or ECN, to arrange orders for trade that can be completed before the market opens, and be recognized once the market officially begins the new trading day. While this approach does have some potential drawbacks, it is possible to make use of pre-market trading to purchase and sell securities and thus generate a significant return.
The concept of pre-market trading is often confused with what is known as after-hours trading. While both strategies do take place outside the normal operating hours of the exchange, pre-market usually applies to transactions that are crafted in the morning hours just prior to the beginning of the new trading day. After-hours trading usually refers to transactions that are negotiated and prepared in the evening hours after the exchange has closed.
One of the main benefits of using a pre-market strategy is that it is possible to buy and sell securities without waiting for the market to open. Assuming that the investors have a good idea of how the market will perform at opening, using an ECN to conduct the trades may position the investor to experience an immediate return on the trade. As with any type of trading activity, it is important to consider past performance as well as projections of future performance before executing the order. This will increase the potential for generating a higher return.
The use of pre-market trading does carry some liabilities. One of the more important potential drawbacks is the fact that trades made outside regular market hours are not bound by the same type of exchange controls that apply during regular trading hours. This means that the trading may involve a lower amount of liquidity and thus have some impact on how much return is generated in the short-term. Some investors who like to make use of a pre-market approach minimize this risk somewhat by choosing to place limit orders during this time frame.
Pre-market trading is not an ideal situation for every investor, nor is it the best strategy with all types of investments. There are situations in which the only way to earn the best return is to follow exchange activity during regular hours and place orders accordingly. For example, an investor may find that waiting until just before the close of the trading day may be the best time to place an order to buy a given security, based on the current purchase price and the anticipation of an increase in that price over the next several days. Waiting until after-hours or pre-market to place the order may result in paying a higher rate per share, and thus decrease the return, assuming the security performs according to expectations.
