Investment Solutions


Investment Solutions


Investment Solutions


How to Use Market Depth to Buy and Sell Shares

Rene Anthony

Monday, July 18, 2022

Monday, July 18, 2022

We take a look at the various ways that market depth is used by investors and traders when investing in stocks, while also pointing out some of the limitations associated with the data.

We take a look at the various ways that market depth is used by investors and traders when investing in stocks, while also pointing out some of the limitations associated with the data.

If you’re new to investing in shares, you might be wondering what is market depth?

Market depth is a snapshot of all the buy and sell orders that have been entered into the market for a particular security. You may search for these orders by using the ticker for the company that you are interested in.

This data can be used to draw a number of insights, which we will touch on shortly. If you are a member of Selfwealth Premium, you will benefit from Live Streaming, where market depth updates continuously in real-time.

First, however, let’s recap how you may view market depth in the Selfwealth platform and navigate through the numbers. 

Viewing Market Depth

To view the market depth for a security, you may do so through the “Buy or Sell Stock” tab found on the menu on the left-hand side of the screen. Simply, enter the ticker code for a company, and look on the right side of the screen.

Alternatively, go to: “Stock Analysis” > “Analysis” > enter the ticker code > choose the “Market Depth” tab.

In this case, we are looking at BHP (ASX: BHP). On the left (1), you will find all the pending buy (bid) orders for BHP. On the right (2), you will find all the pending sell (offer) orders for BHP.

The orders at the top of the queue (list) are the current best offers to buy (or sell) in the market. The number (3) represents how many orders there are at that price. The quantity displayed is the sum of the volume for orders at that price. Click the mini arrow next to the orders number to see a breakdown of the orders.

At the bottom (4), you will also click “See All”. This expands the market depth so you can see every pending order in the market. You will see orders priced far higher and far lower than the current price.

How is Market Depth Useful?

As far as trading tools go, market depth is used by many individuals when investing. Just like stock market news, it can help investors and traders gauge the level of sentiment in a particular stock. The details will show every live order, including the volume at each individual price level.

As such, market depth is useful to understand where your order currently sits, or may sit in the market. This is because it will enter a queue visible to everyone.

If you analyse market depth before you place an order, you may be able to establish how likely it is that your order will be filled. Keep in mind, queuing protocols differ when you submit your order before the opening auction, ahead of the closing auction, or when the stock goes into a ‘notice received’ or ‘trading halt’ status.Read here for an explanation on queues and why there may be a large difference in bid and offer prices.

Market depth may also be considered a leading indicator for liquidity, but it is not always reliable. Generally speaking, if there are just a few orders for a stock sitting in the market, there is less liquidity. A large order has more potential to impact the share price.

On the contrary, where there are many orders for a stock in the market, there is usually significant liquidity. In this case, individual orders are less likely to move the share price.

There are limitations to the above scenarios, which we’ll touch on shortly, but liquidity is an important consideration when investing in stocks.

Some investors also use market depth as a loose estimate for a stock’s ‘support’ or ‘resistance’ levels. You may notice a higher concentration of orders or volume placed at key price levels. This is because traders often set their buy or sell orders at these thresholds.

Finally, market depth can provide a rough indication of supply and demand for a stock. Typically, surplus buying volume might be considered a sign of strength for the share price. However, this isn’t always the case because market depth is not indicative of total supply and demand across the market. In fact, there are a number of caveats to market depth when investing in stocks. 

What are the Limitations of Market Depth?

On the one hand, pending orders provide a high-level view of overall trading sentiment for a stock, but market depth is only based on orders that are currently sitting in the market.

Therefore, this tool is not representative of all volume and sentiment in the market. This is because many buyers and sellers submit their orders directly ‘off screen’. For example, they may set stop losses that do not sit in the queue. Alternatively, rather than queue, some investors may use a market order to buy or sell shares.

Expanding on the above, another thing to consider is how some institutions place their orders when investing in stocks. Institutions may break up large singular orders and drip-feed these into the market through smaller limit orders. This is called an ‘iceberg order’, and not all of the smaller orders will display within the market depth.

Another consideration when analysing market depth is the weight of orders placed at various prices. For shares with high liquidity, this point has less relevance. However, for illiquid stocks, a greater level of scrutiny is required because total volume sitting in the market may be somewhat misleading for overall sentiment.

On the surface, total buy and sell volume could appear similar. However, on one side of the ledger there may be a disproportionate level of volume submitted far from the current trading price.

For example, you wish to invest in stock ‘XYZ’ trading at $0.10, shown below. While it is an illiquid stock, buy volume outweighs sell volume nearly 3:1. However, upon closer inspection, you will see around 80% of buy volume in ‘XYZ’ is sitting 30-40% below the current share price. Therefore, when investing in illiquid stocks, market depth is only useful if you assess the position of each order. 

Final Thoughts

Even when market depth is heavily skewed to one side of the ledger, it is not to say that the price of the stock will follow that support.

At the end of the day, market depth is just one tool to consider among many when investing in stocks. It should not be relied upon as a forecast for a company’s share price. Rather, market depth should be viewed as a helpful order management tool, and a useful but incomplete guide for evaluating sentiment.

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