How does pre market trading work?

Pre-market trading is a trading session that takes place before the regular market session opens. Here's how it works:

1. Timing: Pre-market trading typically starts at 8 a.m. and ends at 9:30 a.m. Eastern Time.
2. Market Activity: During this time, traders can buy and sell stocks, but the market is much less active than during regular trading hours. The volume of trades is typically much lower, and liquidity is thin. This means that bid-ask spreads are often wide, and prices can be more volatile.
3. Types of Orders: Traders can only place limit orders during pre-market trading, which means they must specify the exact price at which they want to buy or sell. This is different from regular trading hours, where market orders are more common.
4. News Reaction: Pre-market trading is often used by investors to react to news that has been released after hours or before the market opens. For example, companies may announce earnings reports or other news after the regular trading session has closed, and investors can trade in the pre-market to react to this news.
5. Indicator: The pre-market trading session is sometimes used as an indicator of how the regular market session might perform. Significant price movements in the pre-market can sometimes foreshadow similar movements during the regular session.
6. Electronic Trading: Pre-market trading is conducted electronically, typically through alternative trading systems (ATS) or electronic communication networks (ECN). This is different from the regular trading session, which involves trading on an exchange like the NASDAQ or New York Stock Exchange.

In summary, pre-market trading is a period of market activity that allows investors to react to news or events that occur outside of the regular trading hours. It is characterized by lower volume, higher volatility, and the use of limit orders.