What is Pre-Market?
Pre-market trading is a time period of trading activity occurring before normal market hours.
The pre-market begins as early as 4 am EST and goes until normal market hours, which begin at 9:30 am.
Many investors observe pre-market activity in order to estimate the strength and direction of the market in anticipation of the regular trading session.
Defining Pre-Market in Simple Terms
Generally there is less activity in the market during the pre-market session than during regular trading hours.
During this time, the volume and liquidity of securities is fairly low, and so large bid-ask spreads are common.
As such, many brokers begin pre-market trading around 8 am, when the volume begins to increase.
Why Pre-Market Trading?
One of the primary reasons investors might elect to engage in pre-market trading despite the apparent risks is to respond to news and rumors that they think will drastically impact a stock or security.
They might wish to get the jump on trading stocks if they think that their value may change imminently.
Additionally, many important economic reports are released prior to normal trading hours and can trigger swings in the market.
The nonfarm payrolls report and producer price index are two examples.
However, the pre-market is not always indicative of the magnitude of a market move in the regular session, and so should be interpreted carefully.