How to Understand Market Depth

How to Understand Market Depth

Apr 02, 2020


Today we're going to look at how to understand market depth.


Maybe some of you haven't even heard of this term or if you have, it might be unclear to you, so I'm going to clear that up for you guys. 


Basically, looking at the order book or the market depth of a stock tells you how many people are buying or selling a stock.

So, I’d like to show you guys what to look out for, how it'll look in your stock trading software, and really just how to get started with it.


Setting up your stock trading

The first thing you need to understand is that in order to buy or sell any stocks, you’re required to use a stockbroker

Nowadays through technology, you can just use online platforms like E-Trade, TD Ameritrade, Fidelity or Charles Schwab.

You can also ask whoever you bank with if they have a trading broker that they recommend.


So, what is market depth?

What you're looking at when you're looking at market depth is how many people are looking to buy a particular stock

This is also known as the asking price.

The bid price tells you how many people are looking to sell

An interesting thing to keep in mind when you're actually stock trading is that there's a small variation in price between what you get your offer at and what you sell it at.

Usually, it's about a penny difference.


Let's say you're looking at a $5 listing and someone's trying to buy 100,000 shares, and at $4.99 someone's trying to sell 5,000.

  • This is what we would call a very shallow or low market depth because there's not a lot of traders here.

To get further information that would allow you to see how many people are actively buying and selling, and at what price, you'd want to go ahead and open up the level two

After you’ve set up your trading software you might have to call their customer service and they'll activate this for you. 

  • You definitely want to make sure you're utilizing that, because that’s how you're going to get the edge and profit from your trades. 


The Ticker Tape

Another important feature that runs along the order book is something called a ticker tape, or a tape.

If you ever hear someone talking about reading the tape or the tape ticker, anything like that, they’re referring to the actual real-time transaction history of the stocks.

  • The reason this is so important to look at is that it’ll tell you in which direction the stock price is going to move.


Hitting the Bid

Another important thing to understand is what’s called hitting the bid.

This happens when you're constantly buying, you're hitting the bid, and it's going to keep on hitting. 

Looking at the previous example, if I see 100,000 on the buy-side and only say 20,000 on the sell side, and if the prices match up,  then I can tell that the stock price is going to go up.

If this $4.99 was 500,000 shares instead of 5,000 I'd assume that the stock price would go down because so many people are trying to sell.

  • It's important to understand that the stock market is just an electronic algorithm.

It's trying to match buyers and sellers and there's a software running behind it that determines the price.

That's why the market spread is so important to know.



As I've mentioned in previous lessons, and what I teach at In Penny Stock University, you'll want to make sure that there's a good volume on your stock and usually, I'd put that out at least 100,000 shares available on the market.

  • Generally speaking, if it's lower than 100,000 you're going to have some lag or some level of difficulty getting in and out of your trades.

So definitely keep an eye out on that and be aware of getting into the more volatile stocks. 


Low Float Stocks

One last important topic I'd like to discuss is low float stocks.

Float just means a number of shares.

When a company goes public, they might not put 100% of their shares on the market.

Some people may have already had reserved percentages or the management team might be holding a percentage as well. 

So, let's say out of 100% of the shares the management team has 30%,  another 30% is for the institutional investors and you have 5% for the leaner lockup restricted shares.

This all adds up to 65% so you're left with 35% of the shares on the public market, which is a pretty decent float.

The reason float is important is that essentially it tells you how many shares of that stock are available to be traded in the public market.


Think of it like this

If you bought 10 key shares of a company with 1 million chairs, then you're only influencing the total amount of shares by about 1%.

If you were to buy 10,000 shares of a company that only had 50,000 shares outstanding, all of a sudden you’ve made an impact on the stock market of 20% of the total amount of shares. 

  • You're going to make a much higher impact when you're controlling 20% of the market versus just 1%



You have to always remember that stock price is influenced solely by how many people are buying and selling.




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