Stake logo


Understanding market risks

The market is experiencing increased volatility at the time of writing.

The piece below brings your attention to ‘gap risk’ and ‘liquidity risk’, two factors to consider while managing your portfolio during such periods.

Whatever your position or strategy, we want to make sure you’re informed and understand the risks and can add them to your knowledge base when tackling the markets. Trending stocks change all the time, so it’s best that you know what you’re getting into before diving in.

Understanding gap risk

It is not uncommon for stocks to gap across price ranges, especially between market close and the following market open. Let’s use an example. A stock closes at $15. Overnight, news comes out which causes the stock to fall. The next morning, it opens at $12. While the price fell 20%, it did not trade at any price between $15 and $12. This is known as a ‘gap down’. The same works inversely when stocks gap up in price.

This is also possible in intraday trading, especially as stocks come out of trading halts.

It is important to be aware of such price action as it has an effect on order fulfilment. A stock may be trading at $50 at the close of a session. You have a stop loss at $45.  Following a gap down before the open, the stock gaps down and opens the next session at $43. Your stop loss will be filled at $43 as the stock did not trade between these points.

In periods of increased volatility, gaps are more likely to occur

Understanding liquidity risk

Even if a stock traded at a particular price, it doesn’t necessarily mean every order for that price would be filled. A highly liquid stock will have a large volume of shares trading at different prices, and a small spread between the bid and ask. An illiquid stock has few shares traded at different prices and a large gap between the bid and ask.

  • A stock may have crossed through your order price but there wasn’t enough liquidity to accommodate your order completely. For example, a stop loss may execute at an average price below your specified stop, even if the stock price hit your stop price. Or on the flip side, a limit sale may not completely fill even if the price reaches your specified limit.
  • With particularly illiquid stocks, a large spread between the bid and ask may make it difficult to buy or sell at your target price.

Liquidity can also come in and out of a stock very quickly, especially more volatile ones. For example, if a highly traded stock starts to dip and buyers stop coming into the market, it may become difficult to sell out of positions.

Trading halts

Such volatility can bring some particular risks to investors, this may include trading halts. We have prepared the following piece to bring your attention to different types of trading that may occur during periods of volatility.


Want more?

You know what to do

Insights, trends and company deep dives delivered straight to your inbox.

Stake logo
Over 7,000 5-star reviews
App Store logoGoogle Play logo

Subscribe to our free newsletters

By subscribing, you agree to our Privacy Policy.

Stakeshop Pty Ltd, trading as Stake, ACN 610105505, is an authorised representative (Authorised Representative No. 1241398) of Sanlam Private Wealth Pty Ltd (Australian Financial Services Licence No. 337927) ('Sanlam') and an authorised representative (Authorised Representative No. 1241398) of Airwallex Pty Ltd (Australian Financial Services Licence No. 487221) ('Airwallex'). Stake is not authorised by Airwallex under Airwallex’s AFSL to arrange for clients to be issued with securities as Airwallex is not authorised under its AFSL for this purpose. Stake is not authorised by Sanlam under Sanlam’s AFSL to arrange for clients to be issued with a non-cash payment facility as Sanlam is not authorised under its AFSL for this purpose. Stake SMSF Pty Ltd (‘Stake Super’) is not licensed to provide financial product advice under the Corporations Act. This specifically applies to any financial products which are established if you instruct Stake Super to set up a self managed super fund (‘SMSF’). When you sign up to Stake Super, you are contracting with Stake SMSF Pty Ltd who will assist in the establishment of a SMSF under a ‘no advice model’. You will also be referred to Stakeshop Pty Ltd to enable your trading account and bank account to be set up in order to use the Stake Website and/or App. Stakeshop Pty Ltd will also run marketing and promotions to you under. For more information about SMSFs, see our SMSF Risks page.The information on our website or our mobile application is not intended to be an inducement, offer or solicitation to anyone in any jurisdiction in which Stake is not regulated or able to market its services. At Stake and Stake Super, we’re focused on giving you a better investing experience but we don’t take into account your personal objectives, circumstances or financial needs. Any advice given by Stake is of a general nature only. As investments carry risk, before making any investment decision, please consider if it’s right for you and seek appropriate taxation and legal advice. Please view our Financial Services GuideTerms & ConditionsPrivacy Policy and Disclaimers  before deciding to invest on or use Stake or Stake Super. By using our website or service in any way, you agree to our Privacy Policy and Terms & Conditions. All financial products involve risk and you should ensure you understand the risks involved as certain financial products may not be suitable to everyone. Past performance of any product described on this website is not a reliable indication of future performance. Stake and Stake Super are registered trademarks in Australia.

Copyright © 2024 Stake. All rights reserved.