Unlike FX, stocks don’t trade around the clock during the working week. They usually trade throughout the business day of the region they’re listed in. This is because there aren’t usually markets in other countries offering the same stocks throughout the day as in the case of Forex (Asian/European/North American sessions).
This means that there are long periods in each day, and also over the weekend, where no trading activity is taking place. Now, even though the stock market may be closed, this doesn’t mean there’s no new information coming out that will change investors’ beliefs or appetites for risk. These changes in outlook and sentiment are the main reasons for market gaps.
A market gap will occur when the stock reopens for trading and the market is struggling to price-in the developments that have taken place since the last time that market was live. If the news is good, you may notice a gap up on the chart between the last close and new opening price. In other words, the new price opens higher than it closed, causing a gap in the price action.
If, on the other hand, the news was bad, then the opposite may occur, with the opening price gapping down compared to the last price it closed at on that previous trading session. Gaps take place for many reasons, one of the most common being earnings announcements.
At the end of each quarter, publicly traded companies are obliged to announce their earnings. These periods are known as earnings season, they are widely traded and can be the catalysts for large swings in price. If a company announces its earnings after the closing bell, and the numbers come as a surprise to market participants, either positively or negatively, it’s not uncommon for there to be a gap in the price at the next market open