Reading the Order Book
Everyone's buy and sell orders sit in a single table. Follow the guided tour and read it line by line.
Key takeaways
- 1The order book has two sides, Bids and Asks, each queued by price. The closer to the middle, the better the price.
- 2Lowest ask − highest bid = the spread. The smaller the spread, the lower the hidden cost of buying and then selling.
- 3Orders at the same price queue first come, first served, and the quantities across all levels add up to the market depth.
Check your understanding
Get every question right to complete this lesson
1.What does the ask level closest to the middle represent?
2.The highest bid is $99.95 and the lowest ask is $100.05. What's the spread?
3.The highest bid is $99.95 and the lowest ask is $100.05. You buy 100 shares with a market order and immediately sell them with a market order. Ignoring fees, roughly how much do you lose?
Text version · Stock Trading: Next Steps, lesson 1: “Reading the Order Book”
Everyone's buy and sell orders sit in a single table. Follow the guided tour and read it line by line.
Sells on top, buys below
The top half of the order book is people who want to sell (asks); the bottom half is people who want to buy (bids). The closer to the middle, the "better" the price.
The gap in the middle: the spread
Lowest ask minus highest bid is the spread. The longer a level's bar, the better the liquidity there.
Same price, first come first served
Each price level often has several orders queued. Matching follows price-time priority: better prices fill first, and orders at the same price queue in order of arrival. Add up the size at every level and you get the market depth.
Key takeaways
- The order book has two sides, Bids and Asks, each queued by price. The closer to the middle, the better the price.
- Lowest ask − highest bid = the spread. The smaller the spread, the lower the hidden cost of buying and then selling.
- Orders at the same price queue first come, first served, and the quantities across all levels add up to the market depth.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Press ▶ to play the tour, or click the step list on the right to jump to any step.
- Stop at step 2: is the red ask level closest to the middle the highest ask or the lowest ask?
- Stop at step 5: subtract the highest bid from the lowest ask to work out the spread.
- Stop at step 6: count how many orders make up this level and how many shares in total.
Quiz and explanations
- 1. What does the ask level closest to the middle represent?
- Answer: The lowest ask (best ask).The closer to the middle, the lower the ask. It's the cheapest price a buyer can get.
- 2. The highest bid is $99.95 and the lowest ask is $100.05. What's the spread?
- Answer: $0.10.$100.05 − $99.95 = $0.10.
- 3. The highest bid is $99.95 and the lowest ask is $100.05. You buy 100 shares with a market order and immediately sell them with a market order. Ignoring fees, roughly how much do you lose?
- Answer: $10.You buy at the ask of $100.05 and sell at the bid of $99.95, losing one spread of $0.10 per share: $10 over 100 shares.
Terms in this lesson
- Ask: The price sellers are asking for. When you buy, you trade at the Ask.
- Bid: The price buyers are willing to pay. When you sell, you trade at the Bid.
- liquidity (Liquidity): How many orders are waiting near a price; the deeper the book, the harder it is to move the price.
- market depth (Market Depth): How much is waiting to trade at each price in the order book; the deeper it is, the harder it is for a large order to push the price far.
- order book (Order Book): All the buy and sell orders that haven't filled yet, lined up by price.
- price-time priority (Price-Time Priority): The matching rule: better-priced orders fill first, and orders at the same price queue in the order they arrived.
- spread (Spread): The gap between the Ask and the Bid, a hidden cost on every trade.