A price gap is a term that is used to describe the change in the price of a security since the last range of trading, without actually overlapping that previous range. There are actually several different types of gaps, including the breakaway gap, the common price gap, the runaway price gap, and the exhaustion price gap. Each of these describe different events that may take place and result in some type of upward or downward movement in the price of a particular security from one period to the next.
In general, the price gap has to do with noting increases or decreases in security prices that are different from a previous price range. This often involves considering the price movement on a particular trading day, including the closing price per share at the end of that day. Should the security open at a price that is slightly higher than the previous day’s closing, and continue to trade within a range that is higher or lower than the range for that previous day, then a price gap is said to exist.
For example, assume that a particular security traded between $25 US dollars (USD) and $30 USD per share on a given date, eventually closing at $30 USD per share at the end of the day. If that same security opens at $32 USD the following trading day and consistently trades at between $32 and $35 USD throughout the day, then a price gap between the two trading periods occurred. A gap would also be present if, during the second trading day, the stock opened at a rate below the previous day’s closing price and consistently traded below the $25 USD price that was involved in trading during that previous trade range.
Tracking the price gap is important, since the amount and frequency of those gaps can provide valuable information about what is happening with a given stock, and possibly with the marketplace in general. Depending on whether the gap was an increase or a decrease over the previous range cited, this may indicate that the stock was either overbought or undersold. The gaps may also indicate the degree of impact that certain events are exerting on the desirability of the stock offering among investors. For example, if a significant gap in stock price occurs after the president of the issuing company resigns and his or her successor is named, this may indicate great confidence or a lack of trust in the new president, depending on what direction the prices moved between the two periods under consideration.