Market Depth

What Is Market Depth?

Market depth describes the volume of buy and sell orders that sit in an exchange's order book at various price levels for a particular stock or other security. The most visible part of the market is the best bid and ask prices, the highest price a buyer will pay and the lowest price a seller will accept. Market depth looks past those two prices and shows how many shares are available to buy or sell at each price just above and below the current level.

How It Works

Each price level in the order book lists the total number of shares that traders have offered at that price. Buy orders, called bids, are stacked below the current price, and sell orders, called offers or asks, are stacked above it. Together, these levels form a picture of how much liquidity is available. Deep markets have large quantities of orders near the current price, so a sizable trade can often be carried out without moving the price much. Shallow markets have fewer orders, so even a modest trade may push the price noticeably higher or lower.

Market depth is usually displayed as a ladder or as a graph, sometimes called a depth chart, that plots cumulative buy and sell volume against price. Many brokerage platforms show a set number of levels on each side of the market.

Why It Matters to Investors

Market depth gives individual investors a sense of how easily a position could be entered or exited. It is especially relevant for thinly traded stocks, where the spread between the bid and ask may be wide and the available volume may be small. Investors also use depth information to judge how a large order might affect the price, since big orders placed into a shallow book can produce a poor average fill price.

Depth has limits, however. Displayed orders can be cancelled or changed at any time, and large traders sometimes place orders they do not intend to fill in order to create a false impression of demand or supply. Depth also shows only what is currently posted, not what will happen next. For this reason, market depth is best viewed as one piece of context alongside trading volume, price history, and the overall liquidity of the security.