Investing in Stocks by Analysing Market Depth

Investing in Stocks by Analysing Market Depth

When investing in stocks, market depth may be used to view 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 interpretations, which we will touch on shortly.

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


Viewing market depth

To view the market depth for a security, you may do so through the “Place Order” page. 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



On the left (1) is all the pending buy orders for BHP. On the right (2) is all the pending sell 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 collective volume from all orders for that price. Click the mini arrow next to the orders number to see an individual breakdown of the orders.

At the bottom (4), you may 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 used when investing in stocks?

As far as trading tools go, market depth is used by many individuals when investing in stocks. It can help investors and traders gauge the level of sentiment in a particular stock. The details will show every live order alongside their size, weight and respective order 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, however, queuing protocol varies 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. We detailed this in one of our previous articles.

Market depth may also be considered a leading indicator for liquidity, among others, but it is not always reliable. Generally speaking, where there are 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 volume of stock placed at key price levels, where traders often set their buy or sell orders.

Finally, market depth can provide a rough indication of supply and demand for a stock. Typically, surplus buying volume might be considered as a sign of strength to underpin 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, market depth should be considered alongside some caveats when investing in stocks.



What are the limitations of market depth when investing in stocks?

On the one hand, pending orders show a high-level view of sentiment among those who are actively investing in stocks, but market depth is only based on orders that are currently sitting in the market.

Therefore, it 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 display in the queue. Alternatively, rather than queue, they may also submit their buy or sell order at the prevailing market price.

Expanding on the above, another thing to consider is how some institutions place their orders when investing in stocks. The term ‘iceberg order’ touches on this. Institutions may break up large singular orders and drip-feed these into the market through smaller limit orders. Not all of these smaller orders may appear in the market depth.

Another consideration when analysing market depth is the weight of orders stacked at various price levels. For shares with high trading volumes, 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 sitting far away 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 is sitting 30-40% below the current share price. When investing in stocks that are illiquid, market depth is only useful if you assess the positioning of orders.



Final thoughts

In conclusion, 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 in turn. 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, it should be viewed as a helpful order management tool and a useful but incomplete guide for evaluating sentiment.


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SelfWealth Ltd ACN 52 154 324 428 (“SelfWealth”) (Australian Financial Services License Number 421789). The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. Taxation, legal and other matters referred to on this website are of a general nature only and should not be relied upon in place of appropriate professional advice.

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