Pre-market trading.

In plain English

Pre-market trading runs on electronic venues in the early morning, before the primary exchange opens its regular session with the opening auction. Volume is a small fraction of the day's total and is concentrated in stocks with overnight news. Because so few orders rest in the book, quoted spreads are wide and a single order can move the price several percent. Most brokers limit these sessions to limit orders and to certain hours, and access varies from broker to broker. The opening auction pulls in far more volume, which is why the pre-market price is a weak predictor of where the stock actually opens.

01Why it matters

A stock quoted up 9 percent before the bell can open up 2 percent or open lower, so acting on a pre-market quote often means paying for a move that real volume has not confirmed.

02The math, step by step

Say a company reports before the open and the stock quotes 5 percent higher pre-market on 40,000 shares. The regular open then trades 3 million shares in the first minutes and settles 1 percent higher. The pre-market price reflected a few hundred participants. The open reflected the market.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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