What Is a Gap?

What Is a Gap?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A gap refers to a break or interruption in a sequence or in a process of events. In the world of business and finance, a gap is usually noticeable when there’s a significant price shift upwards or downwards between the closing price of a stock or security on the previous day and the opening price the next day. This scenario often happens due to important news or events which can have a significant impact on investor sentiment. A gap can be an important indication of a changing market and may present trading opportunities for investors.

Related Questions

1. What are the types of gaps in the stock market?

There are four main types of gaps: Common gaps, breakaway gaps, continuation or runaway gaps, and exhaustion gaps. The different types are formed based on various market conditions and have different implications.

2. What is a Gap Analysis?

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Gap Analysis is a strategic planning tool used to compare where you are (current state) to where you want to be (desired state). It helps businesses identify steps needed to achieve their business objectives.

3. Can a gap be filled?

Yes, gaps can be filled. ‘Filling the gap’ occurs when the price moves back to the original pre-gap level. This can happen due to a change in market conditions or investor sentiment.

4. What causes a gap?

Gaps are usually caused by influential macroeconomic or company-specific events that can shift investor sentiment dramatically. This could be anything from earnings announcements and corporate actions to changes in the broader economic climate.

5. Are gaps a good trading strategy?

While gaps might present interesting trading opportunities, they also come with a risk. Predicting how a gap will be filled is not certain. Therefore, incorporating gaps into your strategies should be done with care and a good understanding of market conditions.