Why Did My Stock Gap Down Overnight?

The close last night was 62.00. This morning the premarket quote says 55.40, and the position you went to bed comfortable with is down more than 10% before the opening bell.

Something happened. Almost always, you can find out what.

What moves a stock while the market is closed

The regular session runs for a few hours a day, while companies, analysts, governments and competitors keep producing information around the clock, and much of the most important of it is released outside the session on purpose, so that everyone has it before trading begins. The usual causes:

• Earnings and guidance. Results often come after the close or before the open. A weak outlook can move a stock more than the quarter itself.
• A share offering. New shares dilute existing holders, and offerings are often priced below the last close.
• Analyst changes. A downgrade or a cut price target, published before the open.
• Company news. A failed trial, a lost contract, an executive departure, a restatement.
• Sector news. A competitor’s bad results can pull down every stock in the group.
• Macro releases. Economic data scheduled before the open can move the whole market, and your stock with it.

Sometimes nothing specific turns up. Then the move is usually the sector or the market, and the index futures will show it.

Why the premarket price looks so extreme

Extended-hours sessions trade on a fraction of normal volume, with wider spreads and fewer participants, so a handful of orders from people reacting fast to a headline can set a price that tells you less than it seems to, and the quote on your screen may rest on very few shares. That is why the after-hours price deserves less weight than the chart gives it.

The open is different. The opening auction collects all the orders that built up overnight and during the premarket and matches them at one price. That price has far more behind it, and it can land above or below the last premarket trade.

What the gap does to your orders

A standing stop does nothing in the premarket at many brokers, since most stop orders are only active during the regular session; whether stops work in extended hours depends on your broker’s settings. At the open, the stop triggers if the first trade is at or below it, and then fills as a market order.

The stop worked. It simply had nothing to sell into between 62.00 and 55.60. The full explanation is in what happens to your stop when a stock gaps.

Where to look, in order

1. The company’s investor relations site, for a press release.
2. The SEC’s EDGAR filing system, for a new 8-K, a prospectus or other filings.
3. A news feed or your broker’s news tab, for analyst actions.
4. The sector: check two or three peers.
5. Index futures, for a market-wide move.

Read the actual release or filing. Headlines compress, and the number that matters is often further down. When the company holds a conference call, the call and its slides often explain what the release only states, and the question-and-answer section can tell you whether management sees a one-quarter problem or something that will take longer to fix.

What to decide before the open

Decide whether the reason you owned the stock still holds. A dilutive offering, a guidance cut and a market-wide selloff are three very different problems, and each can deserve a different response even when the percentage drop on your screen looks exactly the same.

Then look at your orders. Do you want your stop to fire into the opening auction? Would you prefer a limit sell, a smaller exit, or to wait for the first minutes of trading to settle? There is no default right answer here, and chasing the gap to close is not a plan, which gaps do not have to fill argues at length.

Write the decision down before 9:30 Eastern.