What is Market Depth?
Market depth refers to a security's ability to tolerate the execution of large market orders without having a large effect on the security's price.
How Does Market Depth Work?
Also called depth of market, market depth measures the number of units that must be traded before a stock or bond's price moves. A security's market depth is a function of the proportion of buy orders to sell orders and the liquidity of the issuing company.
For example, a stock with similar numbers of outstanding buys and sells at a given time has greater market depth than a stock with lopsided numbers of buys and sells.
Why Does Market Depth Matter?
Stocks that display consistently high levels of market depth do not require market makers to facilitate or supplement the volume of buy and sell orders.
