When you are investing in the stock market, it’s important to understand how the market opens and how the prices of stocks are set. One important part of this process is the pre-open session. This session happens before the normal stock market trading begins. Let’s break it down in simple terms so you can understand how it works and why it matters to you as an investor.

What is the Pre-Open Session?

The pre-open session is a short period that happens before the stock market opens at 9:15 AM. It starts at 9:00 AM and lasts until 9:15 AM. During this time, the stock market collects orders from investors but does not start trading yet. The main goal of this session is to figure out the opening price of each stock. It helps the market get ready for normal trading by matching buy and sell orders.

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The Three Phases of the Pre-Open Session

The pre-open session happens in three simple phases:

1. Order Collection Phase (9:00 AM to 9:08 AM)

• What Happens: This is the first phase where investors can place their buy or sell orders. These orders are collected, but no trades are executed yet.

• Why It's Important: It helps gather all the buy and sell orders from investors and traders. During this phase, investors can decide on their buying or selling prices for the stock. This phase doesn’t involve any price movement; it’s just about collecting orders.

2. Order Matching Phase (9:08 AM to 9:12 AM)

• What Happens: During this phase, the stock market begins to match buy and sell orders based on the prices set by investors. The system finds the best prices at which these orders can be matched.

• Why It's Important: This phase is crucial for price discovery — determining the fair opening price of each stock. The market tries to match as many buy and sell orders as possible to set the opening price for each stock.

3. Settlement Phase (9:12 AM to 9:15 AM)

• What happens: Once the orders have been matched, the stock exchange settles the transactions. This is when the opening price for each stock is finalized based on the matched orders. After this phase, the stock market opens for normal trading at 9:15 AM.

• Why It's Important: It ensures that all the orders are settled, and the market is ready for regular trading. The opening price, which was determined during the matching phase, will be used when the market officially opens.

How the Pre-Open Session Works

The pre-open session is very important for price discovery. This simply means finding out the fair value or price of each stock when the market opens. The market does this by matching buy and sell orders. The price at which these orders are matched is called the opening price.

The opening price is decided based on the average price at which the buy and sell orders are matched during the pre-open session. The market uses a call auction system, where all the orders are collected and then matched to find the best price for the opening of the stock.

Stock Opening Price Determined in the Pre-Open Session

Let’s assume there are multiple buy orders for a stock placed during the pre-open session. We will calculate the opening price based on the total number of shares bought at different prices.

Now, we calculate the total number of shares and the total value:

• Total Shares = 100 + 200 + 150 = 450 shares

• Total Value = ₹10,000 + ₹20,200 + ₹15,300 = ₹45,500

Next, we calculate the opening price using the formula:

Opening Price = Total Value / Total Shares
Opening Price = ₹45,500 / 450 = ₹101

So, the opening price of the stock is ₹101.

Why Does the Pre-Open Session Matter?

The pre-open session is important because it helps in price discovery. It makes sure that the stock opens at a fair price, which is based on real market orders and not on sudden movements in prices. It reduces the chances of the stock price jumping or falling too much when the market opens.

For investors, this means that the stock market is more organized and stable when trading begins. It also helps in reducing surprises caused by news or other market events that happen before the market opens.

Pre-Open Session and Market Volatility

The pre-open session helps reduce sudden price changes when the market opens. It works like a filter to smooth any shocks from overnight news or other market events. Without this session, stocks could open with huge price swings, making it harder to make decisions as an investor.

For example, if bad news about a company comes out overnight, the pre-open session allows the market to adjust the price slowly, rather than letting it open with a big drop. This makes the stock market safer for investors.

How Does the Pre-Open Session Help Short-Term Traders?

For traders who buy and sell stocks quickly (called intraday traders), the pre-open session is very helpful. It provides them with a fair starting price for the day. Knowing the opening price helps traders plan their buying or selling strategy better. It also helps them avoid the risks of huge price movements that can happen when the market opens suddenly.

Common Misconceptions About the Pre-Open Session

• It’s a Time for Big Price Movements

  Some people believe that the pre-open session is when stock prices will change a lot. In reality, the pre-open session is meant to find a fair price for each stock and prevent sharp price movements when the market opens.

• It Guarantees the Perfect Opening Price

  While the pre-open session helps in determining a fair opening price, it doesn’t always guarantee that the stock price will remain stable throughout the day. Prices can still change after the market officially opens based on new information or market events.

• Pre-Open Session is Only for Big Investors

  Many think the pre-open session is only useful for large investors or institutions. But it's also important for retail investors because it helps set a fair price for stocks when the market opens, reducing surprises.

• It Works the Same for All Stocks

  Not all stocks behave the same in the pre-open session. For stocks with lower liquidity or fewer orders, the pre-open session might not be as effective in finding a fair opening price. This could lead to more price volatility when the market officially opens.

• You Can Trade During the Pre-Open Session

  The pre-open session is for order collection and price discovery, not for active trading. Orders are only collected and matched to set a fair opening price, and no transactions are executed during this time. Trading starts after the market opens at 9:15 AM.

• The Pre-Open Session is Only for Stock Price Discovery

  While the pre-open session helps in setting a fair opening price, it also plays a role in stabilizing the market by preventing price fluctuations that could happen if market orders were executed right away without any preparation.

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Frequently Asked Questions (FAQs) on Pre-Open Session