What is 'Depth'

Depth is a market measure that shows the ability of a security to absorb buy and sell orders without the stock price dramatically moving in either direction. Depth is closely related to the liquidity of the market. A deep market can be expected to absorb larger buy and sell orders before an order moves the price. Generally, deep markets will have smaller bid-ask spreads because of the increased competition among market makers for order flow.

Also referred to as "market depth” or “depth of market."

BREAKING DOWN 'Depth'

Depth in a market can be measured in several ways through various indicators.

Depth Indicators

The following are some of the leading factors and indicators that can help an investor to identify and understand market depth for a security:

Liquidity: Liquidity is an important indicator for depth in a security. Liquidity is typically shown by volume. If a security has a high average daily trading volume, then an investor can be confident that they can easily transact either a buy or sell order at the market price on any given day.

Bid-ask spread: The bid-ask spread is a market measure that is created from the use of market makers. Market makers buy securities at the bid price and sell at the ask price. The difference goes to the market maker as profit. In a heavily traded security that is considered to have significant market depth, the bid-ask spread will typically be relatively small. This means that there is high supply with high demand for the security. When demand and supply are high, bid and ask prices are typically more closely in line.

Open orders: Open orders, also known as good ‘til canceled (GTC) orders, on a security can also be a signal of market depth. Investors have the option to place both limit and stop order trades. Limit orders designate a specific price at which to buy a security and a specific price at which to sell a security. Stop orders are typically used to stop losses and set a price floor. When there are a significant number of these orders open on a security it will contribute to the security’s depth. When the price points on these orders are triggered they help to increase supply and demand.

Depth Inferences

In a deep market there will be a long list of buyers and sellers at various prices in the order book. This is good for investors because it means that the market is not dependent on any one entity to provide adequate liquidity. As market depth increases the effects of a single trade decrease. Therefore, deep markets can sustain large market orders without showing a significant effect on the stock’s price.

Depth is particularly important for institutional investors who routinely need to buy and sell large amounts of a security. It is much easier for an institution to trade a security that has a deep market without broadcasting its intentions or moving the market against itself.

RELATED TERMS
  1. Depth of Market (DOM)

    Depth of market (DOM) is a measure of the number of open buy ...
  2. Deep Market

    A deep market is a securities exchange where a large number of ...
  3. Order

    An order is an investor's instructions to a broker or brokerage ...
  4. Order Driven Market

    An order driven market is where buyers and sellers display their ...
  5. End of Day Order

    An end of day order is a buy or sell order requested by an investor ...
  6. Bid and Ask

    The term "bid and ask" refers to a two-way price quotation that ...
Related Articles
  1. Trading

    The Basics of the Bid-Ask Spread

    The bid-ask spread is the difference between the bid price and ask price prices for a particular security.
  2. Investing

    How To Calculate The Bid-Ask Spread

    It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions.
  3. Investing

    Narrow Your Range With Stop-Limit Orders

    With stop-limit orders, buyers protect themselves from prices too high for their tastes.
RELATED FAQS
  1. The difference between a market order and limit order

    Market orders execute a trade to buy or sell immediately at the best available price. A limit order only trades when the ... Read Answer >>
  2. What number of shares determines adequate liquidity for a stock?

    Learn how the liquidity of a company's shares is generally affected by bid-ask spread and trading volume of shares bought ... Read Answer >>
  3. How do I place an order to buy or sell shares?

    Read a brief overview of how to open a brokerage account, how to buy and sell stock, and the different kinds of trade orders ... Read Answer >>
  4. What's the difference between a stop and a limit order?

    A limit order is an order that sets the maximum or minimum at which you are willing to buy or sell a particular stock. With ... Read Answer >>
  5. What is the difference between a buy limit and a stop order?

    Learn the difference between buy limit orders and stop orders, including stop loss orders, and understand the risks of the ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center