Groww Digest

6 Day Course

Theme: market depth

Jan 29 to Feb 4 2024

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Day 1: Monday
Theme: market depth

A good way to understand market depth is

this:How many buy/sell transactions of a stock
can take place while having the least effect on
the stock price?

This can be a bit difficult to understand.

The price of a stock depends on the supply

and demand for that stock.

So, if the supply is low and demand is high,

the price shoots up.

If the supply is high and demand is low, the

price shoots down.

The idea of market depth is this: if the number

of buyers/sellers is high, the price will be more
stable.

We’ll understand this concept in more detail in

this week’s course.

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Day 2: Tuesday
Theme: market depth

Let’s understand the demand-supply better.

Let’s say there is a large marketplace where traders are

trading onions.

Every trade is auctioned.

Now, imagine a truck with 5 tons of onions has come and

they are trying to sell.

This truck’s onion load gets sold for Rs 20/kg.

This is the price of onion in the market now.

The next truck with 5 tons of onions gets sold for Rs

23/kg.

This is the new price of onions in the market. The last sale
has influenced the price of the item in the market.

There is one man who goes and buys only 2 kg of onion.

You can imagine, his buying of 2 kg of onion will not

impact the price in the market — his buy quantity is too
small compared to the tons of onions people are
buying/selling.

This is an example of a market with great depth — when

compared to the quantity bought by the man.

Page: 3
Day 3: Wednesday
Theme: market depth

To understand market depth in more detail, we have

to understand a few other things first.

At any point in time, there are buyers and sellers for

each stock.

This dynamic keeps changing every second the market

is open.

Bid-ask spread:

At any point in time, the bid is the highest price

someone is willing to pay for a stock.

Ask is the lowest price at which someone is willing to

sell that same stock.

Spread is the difference between the bid and ask.

Example: company ABC’s stocks are trading. The

markets are open. It is 1:31 pm.

At this point:

Bid: Rs 30
Ask: Rs 33
Therefore, spread = Rs 3

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Day 4: Thursday
Theme: market depth

Yesterday we discussed the bid-ask spread.

Today let’s talk about volume.

In the stock markets, volume refers to the

number of stocks traded (bought and sold).

Example:

500 shares of a company ABC is sold by one

seller (and bought by another).

So the volume of that share is 500.

Now, another investor buys 1,000 shares (which

means someone else sold 1,000 shares).

So the volume increases by 1,000. So now, the

volume of that share is 500 + 1,000 = 1,500.

Often, volume is measured per day.

Example: company XYZ’s total volume today was

50,000.

Page: 5
Day 5: Friday
Theme: market depth

Please revise the previous days' courses to understand today’s

course better.

Your stock broking platform will show a table called ‘Market

Depth’.

On the left will be the bid side and on the right will be the ask side.

There will also be different stock prices listed on each side. Beside
each stock price, you will see a quantity.

Understanding this table is a bit technical. You will have to study

beyond this course.

We will try to explain in simple terms here so you get the general
idea.

The quantity indicates how many shares are available to trade at

that price level.

Example: let’s say 1,000 shares are available at Rs 2,021.

If you want to buy 100 shares for Rs 2,021, you can easily do so.

But if you want to buy 2,000 shares for Rs 2,021, it will not happen
at this price level. You might have to spend a higher amount.

And doing so will increase the share’s price a bit.

So, market depth refers to this.

If the number of stocks trading at any price level is very high, you
can buy/sell more stocks without affecting the share’s price.

Page: 6
Day 6: Sunday
Theme: market depth

We’ve reached the end of this week’s course

that started on Monday.

Here’s a test you should take. Get pen and

paper!

Question 1:
The idea of market depth is this: if the number
of buyers/sellers is high, the price will be more
stable.

-True
-False

Question 2:
High quantities of an item are being bought
and sold. If you buy a small quantity of that
item, the price will

-Go up considerably
-Go up or down very little
-Go down considerably

Page: 7
Day 6: Sunday
Theme: market depth

Question 3:
Bid price: Rs 41
Ask price: Rs 45
Spread is:

-Rs 86
-Rs 4
-Rs 1,845

Question 4:
In a day, 100 stocks of ABC are sold at 10 am,
500 stocks are sold at 1 pm. 200 stocks are
sold at 3 pm. Volume is:

-800
-500
-200

Question 5:
Market depth table has the following details:

-Bid
-Bid and ask
-Bid, ask, and quantities
-None of the above

Page: 8
Day 6: Sunday
Theme: market depth

Answers:

Q1: True
Q2: Go up or down very little
Q3: Rs 4
Q4: 800
Q5: Bid, ask, and quantities

Page: 9
 That’s it for this week!

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See you next week!

—Groww Digest Team

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