Gap Risk

The risk that a gap may occur, in which no trading occurs between significant price levels. For example a stock may close at $70 only to open at $50 due to unfavorable news releases.

When a stock gaps down overnight, stops aren’t executed and therefore cannot protect an investor from the adverse price movement. The only way an investor can protect himself from gap risk is having a diversified portfolio, minimizing the effect on the portfolio in case such an event occurs.