Gap (Gap Up / Gap Down)
When the opening price starts well away from the previous close — the result of overnight earnings or news being priced in all at once.
Gap = the opening price starts far from the prior day's close (the empty space on the chart = the "gap")
A gap up usually reflects good news (such as strong earnings), and a gap down reflects bad news.
In plain terms
A gap is when the price at the open starts at a level that has "jumped" away from where it ended yesterday. An empty space appears on the chart, which is why it's called a gap. Jumping higher is a gap up; starting lower is a gap down.
Usually, when earnings or big news come out overnight while the market is closed, it all gets reflected the next morning and a gap forms. For example, if earnings come in far above expectations, the stock opens with a gap up.
What it tells you
A gap shows how "something that happened outside trading hours gets reflected in the price in an instant." Big information such as earnings, mergers and acquisitions, or bad news is often the cause of a gap.
So the nature of a gap depends on "why it happened" (what news or earnings caused it). Different causes lead to different moves afterward.
Formula
Gap = the opening price starts far from the prior day's close (the empty space on the chart = the "gap") Gap up = jumps higher / Gap down = jumps lower
What high or low means
A gap up usually reflects good news (such as strong earnings), and a gap down reflects bad news. That said, a stock can gap up and then pull back as the catalyst fades, or gap down and then rebound after heavy selling.
Whether the gap gets filled during the day (whether the price goes back to close the gap) is also often observed, but this can only be known after the fact.
Seeing a gap up and thinking "it's going up, so let's follow it" is risky. If the good news has already been fully priced into the gap, the price can pull back afterward as profits are taken. (This is a concept explanation, not a trading suggestion.)
The size of a gap and its cause are separate matters — whether the cause is temporary or structural changes what happens next. If the cause disappears, the gap may get filled back in.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see SEC-filing-based financial metrics alongside the sector benchmark.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.