What does a  “Stock Gap” mean?”

A stock gapping at its open means that news moved the stock price dramatically from the previous closing price, leaving a blank space or “gap” on the stock’s chart.

Gapping – Up or Down

  • When a stock “gaps up,” the stock price opens much higher than the previous day’s closing price. A gap up happens on good news.
  • When a stock “gaps down” the stock price opens much lower than the previous day’s closing price. A gap down happens on bad news.

The Nightmare Scenario – Novavax

Novavax (NVAX), the small biopharma company, lost more than 60% of its stock’s value overnight after reporting failed drug trials – note the “gap” or missing space at the height of the stock’s drop.

On the evening of Wednesday, February 27, 2018, Novavax (NVAX), a small biopharmaceutical company, announced that its main drug designed to prevent pneumonia in infants, ResVax, failed its pretrial results. This is an example of a company-specific bad news event. When it comes to biopharma companies, this is a worst news event.

On Wednesday, NVAX’s price per share was $2.06. On Thursday, the stock opened at $0.77. The total change? NVAX dropped 62.6% in value. When you look at the chart, you can see a blank space at the top of the day’s candle – a gap between the closing price of the day before and the opening price of the day of the drop.

EXTRA TIP: Price vs. Percentage

New investors often get wrapped up in discussing a stock’s price movements in terms of price rather than percentage, maybe as a throwback to dealing in terms of buying and selling consumer products. In NVAX’s case, the stock price only dropped $1.29, right?

Although the $1.29 price drop in terms of dollars is a true statement, investors must train themselves to always think about stock movements in terms of percentage rather than price because that $1.29 move applies to each and every share an investor owns.

Think about NVAX’s decline this way: If an investor held a $10,000 investment at $2.06 a share on Wednesday, that $10,000 investment is now worth less than $3,800. Each share the investor owned dropped more than 62% in value reducing the entire investment by more than $6,200 or 62%.