Introduction
You can still trade before things open up, even if the stock market and exchanges technically only operate within certain hours. Investors may purchase and sell equities before the market's opening during premarket trading. This trading strategy can allow investors to respond to breaking news and events. However, for inexperienced investors, premarket stock trading can be risky due to a small number of buyers and unpredictable prices.
How to Trade in Stock Premarket
The pre-open session is held from 9:00 to 9:15 am and lasts for 15 minutes. Order gathering and order matching periods make up the pre-open session. The applicable price range must match that of the open market.
Order entry, order revision, and cancellation are all permitted throughout the order collection period of 8* minutes. (* - System-driven random closure between minutes 7 and 8). Orders can be placed, changed, and canceled during this time.
The NEAT+ Terminal provides the members with real-time access to information such as the indicative equilibrium/opening price of the security and the total purchase and sell amount of the security.
Based on the orders in the order book, the indicative NIFTY Index value and the percentage change of the indicative equilibrium price to the prior closure price are calculated and released during the premarket stock trading.
Following the conclusion of the order collection phase, the order matching period begins. Orders are matched at an open price that is one (equilibrium) price. The following steps are taken to match orders:
A match is made between eligible limit orders and eligible limit orders.
Market orders are matched with residually qualified limit orders.
Market orders and market orders are matched.
Calculating the equilibrium price
The equilibrium price in a call auction price mechanism is established as indicated below. Assume that between 9:00 am and 9:15 am, NSE received bids for specific stock XYZ at different prices. The exchange will reach the equilibrium price or the price at which the most shares can be purchased or sold, based on the demand-supply mechanism theory. The opening price in the example below will be 105, and a maximum of 27,500 shares may be exchanged.
Order modifications, order cancellations, and trade cancellations are not permitted during the order matching period. Before the regular stock market trading commences, the deal confirmations are distributed to the appropriate members via their trading terminals. Once order matching is finished, there is a quiet interval to make it easier to switch from pre-open session to regular market. All open orders are transferred to the regular stock trading while keeping the original time stamp.
Market orders are at the established equilibrium price, whereas limit orders are at the limit price. All market orders are transferred to the regular market at the previous day's close price or adjusted close price/base price based on price-time priority if no equilibrium price is found during the pre-open session. As a result, trading on the Normal Market, Odd Lot Market, and Retail Debt Market begins at 9:15 am, following the conclusion of the pre-open session. Block trading will be available within 35 minutes of the stock market's start.
Based on the demand-supply process, the opening price is chosen. The price at which the maximum volume is executed is the equilibrium price. The equilibrium price is the price at which there is the smallest amount of unmatched orders when more than one price satisfies the stated conditions. The equilibrium price is the one that is closest to the closing price from the previous day in cases where more than one price has the same minimum order mismatched quantity.
The previous day's closing price will be used as the equilibrium price if it is the midpoint of the two closest values. In the event of corporate action, the closing price from the previous day is changed to the closing price or the base price. Limit orders and market orders are considered when calculating the equilibrium price. The opening price for the day is the equilibrium price established in the pre-open session.
Only market orders are matched at the previous day's close price or modified close price/base price when they are present on both the buy and sell side. The opening price is the previous day's close, modified closing price, or base price. The price of the first trade in the stock market is the open price if a price is not found during the premarket stock trading.
Which Stocks Trade Premarket
At present, the exchanges have enabled only NIFTY 50 and SENSEX 30 stocks at NSE and BSE, respectively, for trading in the Pre-open market session.
How Premarket Stock Trading Today Works
If you're asking who can benefit from premarket stock trading, the answer is everyone. Although institutional and wealthy investors typically trade before the market starts, everyone technically has the option to do so.
Some investors keep an eye on premarket stock trading to see how the market and specific stocks are performing before the start of regular trading hours. Price and trading volume changes can signify what will happen in the market later in the day.
Additionally, traders employ premarket trading to attempt to outperform market responses to breaking news. International occurrences, political unrest, and other elements can impact markets or specific stocks.
An organization might, for instance, declare its earnings following the market's closing. The stock may increase or decrease on the following trading day if the earnings news significantly exceeds expectations. Before the retail market has a chance to react to the news, a premarket trader may try to purchase or sell early.
Premarket interest may also be sparked by other occurrences, such as a legal verdict or a change in laws. A stock's rating change by a well-known analyst can also boost premarket stock trading.
Benefits of Premarket Stock Trading
Extended hours trading, which includes both premarket and after-hours trading, has similar advantages and dangers. Let's start by examining the advantages:
Gives the chance to respond quickly to overnight news: Retail investors get the chance to respond to overnight news during premarket trading before the primary trading day starts. A large company announcement, corporate earnings (although most companies release earnings after markets close rather than before the open), overnight breaking news like a geopolitical development, or news from international markets could all qualify as such information. The warning, in this case, is that the premarket response to such news can change during the regular trading session. When the market opens and regular trading volumes are met, the restricted trading volume in the premarket may signal strength or weakness that may not be confirmed. For instance, a stock that reports a shortfall in results may experience significant declines in premarket trading, but it may change course and close the day higher.
Convenience: Since not everyone has a schedule that allows trading during typical market hours, this is a significant advantage for the do-it-yourself investor. Due to the hectic pace of daily life, most individuals find it a huge advantage to start the day early and execute trades in the premarket.
Get a head start on the opposition: Smart investors and traders with experience in after-hours trading may use the premarket to purchase or sell stocks at prices that are more advantageous than those attained by other traders during the regular session. It is only conceivable if the stock does not entirely discount the news in premarket trading and the premarket reaction to news about the stock is accurate. A stock that trades higher in the premarket will typically trend significantly higher during regular trading, whereas a stock that trades lower in the premarket would typically trend lower.
The Bottom Line
Premarket trading might give a chance to knowledgeable and experienced investors. Additionally, it is much riskier than trading during regular business hours. Due to this, investors tend to observe premarket trading activity rather than taking part in it.
Trading before the market begins will probably put novice investors up against seasoned pros with far more experience. Having a professional on your side might be beneficial if you continue to be lured to those early trading hours.