# Market Depth Explained: Definition, Uses, and Real-World Examples

![Market Depth: A market's ability to sustain relatively large orders without significantly impacting the price of securities.](https://www.investopedia.com/thmb/Z--N-5U6agF2u99ZHbimPOVIVDQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/marketdepth.asp-final-0944eecd7acc4a74ab734b2c0721cd95.png)

*— Investopedia / Zoe Hansen*

> **Definition**
>
> Market depth measures a market's ability to absorb large orders without significantly affecting the security's price.

## What Is Market Depth?

Market depth refers to a market's ability to absorb relatively large [market orders](https://www.investopedia.com/terms/m/marketorder.asp) without significantly impacting the price of the security. Market depth considers the overall number of open bids and offers in an order book, and is a crucial measure of liquidity.

Generally, more buy and sell orders mean greater market depth, assuming these orders are spread evenly around the current price. Institutional traders need to consider market depth when making large trades, because a large buy or sell order could cause the price to shift. However, market depth does not always correlate with high trading volumes.

### Key Takeaways

*   Market depth reflects a market's ability to absorb large orders without significantly affecting the security's price.  
    
*   It evaluates the level of open buy and sell orders, or bids and offers, at various price levels.  
    
*   A security with strong market depth will show minimal price changes despite large trade volumes.  
    
*   Market depth data, often displayed in an order book, helps traders understand potential price movements and liquidity.  
    
*   Real-time market depth information is now widely available through trading platforms, allowing traders to make informed decisions.

## Exploring Market Depth and Its Impact on Trading

Market depth, or [depth of market (DOM)](https://www.investopedia.com/terms/d/depth-of-market.asp), is closely related to liquidity and volume within a security, but does not imply that every stock showing a high trade volume has good market depth. Market depth can be evaluated by looking at the [order book](https://www.investopedia.com/terms/o/order-book.asp) of a security, which consists of a list of pending orders to buy or sell at various price levels. Any day can see order imbalances causing high volatility, even in stocks with high daily volumes.

> **Important**
>
> The decimalization of ticks on the major U.S. exchanges has been said to increase overall market depth, as evidenced by the decreased importance of market makers, a position needed in the past to prevent order imbalances.

Market depth derives from all the orders in a security's order book at any time. It's the amount traded for a [limit order](https://www.investopedia.com/terms/l/limitorder.asp) at a set price not limited by size, or the worst price for a market order limited by size.

Price changes may draw more orders, but this isn't part of market depth because it's unpredictable. For example, if the market for a stock is "deep," there will be a sufficient volume of pending orders on both the [bid and ask](https://www.investopedia.com/terms/b/bid-and-ask.asp) side, preventing a large order from significantly moving the price.

Depth of market also refers to the number of shares of a particular stock which can be bought without causing price appreciation. If the stock is extremely [liquid](https://www.investopedia.com/terms/l/liquidity.asp) and has a large number of buyers and [sellers](https://www.investopedia.com/terms/s/seller.asp), purchasing a bulk of shares typically will not result in noticeable stock price movements.

## Utilizing Market Depth Data for Trading Success

Market depth data helps traders determine where the price of a particular security could be heading. For example, a trader may use market depth data to understand the [bid-ask spread](https://www.investopedia.com/terms/b/bid-askspread.asp) for a security, along with the [volume](https://www.investopedia.com/terms/v/volume.asp) accumulating above both figures.

Securities with strong market depth will usually have strong volume and be quite liquid, allowing traders to place large orders without significantly affecting the market price. Meanwhile, securities with poor depth could be moved if a buy or sell order is large enough.

Market depth data usually exists in the form of an electronic list of buy and sell orders known as the order book. These are organized by price level and updated in [real-time](https://www.investopedia.com/terms/r/real_time.asp) to reflect current activity. In the past, this data used to be available for a fee, but nowadays most [trading platforms](https://www.investopedia.com/terms/t/trading-platform.asp) offer some form of market depth display for free. This allows all parties trading in a security to see a full list of buy and sell orders pending execution, along with their sizes—instead of simply the best ones.

Real-time market depth data allows traders to profit from short-term price volatility. For example, if a company [goes public](https://www.investopedia.com/terms/g/goingpublic.asp) and begins trading for the first time, traders can stand by for strong buying demand, signaling the price of the newly public firm could continue an upward trajectory.

## Real-World Example: Understanding Market Depth in Action

Consider the order book information in the image below, which displays the current bid-ask spread on the left, along with the market depth on the right. This type of quote is also known as [level 2](https://www.investopedia.com/terms/l/level2.asp) market data.

![Order Book for Market Depth](https://www.investopedia.com/thmb/4yerHNTIeEgUBkdxcsu3sY1r2Ps=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/RobinhoodLevel2-9fc2600afd384175b8b6a9af7e37df62.png)

*Order Book for Market Depth.*

The current quote in the security, MEOW shares, is $13.62 – $13.68, with 3,000 shares on the bid and 500 shares on the offer. The right panel indicates the depth of bids on the left. If all 3,000 shares were sold at $13.62, the next best bid would be $13.45, but only for 16 shares.

Should you have an order to sell 10,000 MEOW shares at the market, you would sell all the available bids down to $13.35, where there is a standing order to buy 43,500 shares. Selling 10,000 shares would thus move the market down nearly 30 cents, or about 2%. This indicates a low level of market depth.

> **Article Sources**
>
> 1.  Nasdaq. "[Nasdaq TotalView-Greater Insights with Full Depth-of-Book](https://www.nasdaq.com/solutions/nasdaq-totalview)."