Market Depth
What It Is:
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 It Works/Example:
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 It Matters:
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.
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Cached on May 24, 2012, 10:24 am