How markets work
Gap
A jump between one session’s close and the next session’s open, with no trading in between.
How it works
Gaps happen because information arrives while the market is shut. Earnings, regulatory decisions and macro news mostly land outside hours, and the price simply reopens somewhere else.
Gaps are why stop orders cannot guarantee a price. A stop set below the last close does not protect you if the market opens far beneath it.
Where it misleads people
Backtests that assume you could sell at your stop level systematically overstate returns, because they ignore gaps. Real stop losses fill at the next available price.
Worked example
A share closes at $50 and reports disappointing results overnight. It opens at $41. Nobody had the chance to sell at $47 — that price never existed.
Related terms
- Stop orderA dormant order that becomes a market order once the price passes a level you set.
- After-hours tradingTrading that happens outside an exchange’s regular session, in a much thinner market.
- Earnings announcementA company’s scheduled publication of its financial results for a quarter or year.
- VolatilityHow much an investment’s returns bounce around their average — the standard measure of risk.
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