What is Market Depth?

Market depth is the overall level of open buy and sell orders for an individual security. You can quickly check the number of orders and their corresponding prices if you want to know if there are sufficient liquidity levels. For example, low liquidity can be present for particular interest rate securities and warrants.

A market depth table is composed of buyers, sellers, and prices that the buyers want to buy at and sellers wish to sell at. In the middle column you will see quantity, which is the total shares in the market and total shares bought and sold at a certain price.

Let's take stock ABC. If there is enough volume of pending buy (offer) and sell (ask) orders to prevent a large order from considerable price changes, then the market for that stock is "deep." Liquidity and volume of a security are closely related to market depth. This does not mean that a stock showing high trade volume has 'good' market depth as there may be an order imbalance. This means that even the stocks with high daily volumes can be thrown off by large orders.

Market depth is used by traders to view prices and volumes (bid and ask volumes of orders) below and above the market bid and ask prices. Good depth is characterized by liquidity, with large orders having no significant effect on price. Securities with poor depth are likely to have their price affected by large orders to buy and sell.

Liquidity is important, and share traders use it to capitalise on short-term volatility while investors use it to buy and hold stocks.