Understanding Market Depth

Market depth is a term that is often used in the stock market when referring to a particular stock. Here are the basics of what market depth is and how it affects you as an investor.

Market Depth

Market depth is a term that is used to describe how well the market will be able to absorb large orders without changing the price of the security. If a stock has good market depth, someone can place a very large order of stock and the price in the market is not going to be substantially changed. If a stock does not have good market depth, a larger order could significantly impact the trading price of stock in the market.

What Determines Depth

Just because a particular stock has a high volume for the day does not necessarily mean that it has good market depth. In order to qualify as being deep, there has to be a number of pending orders on both the buy and sell sides of a stock. If there is an unusually high amount of buy or sell orders, this is going to create a scenario where the market is not deep and the price of the stock is very volatile.

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