Learn the stock market › How to trade on the exchange › Lesson 1 of 6
What is an order book?
An order book in numbers
The numbers here are a made-up example, so that the sums are easy to follow.
| Want to buy, shares | Bid | Ask | Want to sell, shares |
|---|---|---|---|
| 400 | $99.90 | $100.00 | 300 |
| 900 | $99.80 | $100.10 | 700 |
| 1,500 | $99.70 | $100.20 | 1,200 |
On the left are the people who want to buy, with the highest bid on top. On the right are those who want to sell, with the lowest price on top. The two prices on the top row are the best bid and the best ask. The difference between them is the spread, which has its own lesson.
No trade is happening right now. The buyers will pay at most $99.90 and the sellers want at least $100.00. The orders wait until someone changes their mind or a new order arrives.
What happens when an order arrives
Say you want to buy 1,000 shares at once. You first take the 300 shares offered at $100.00, then the rest from the next row.
| Price | Shares | Amount |
|---|---|---|
| $100.00 | 300 | $30,000 |
| $100.10 | 700 | $70,070 |
| Total | 1,000 | $100,070 |
So you pay $100.07 on average. The price you see first only holds for as many shares as sit on that row.
After the trade the next seller is on top, and a different price is showing. That is how a price moves. A large order can move it by itself, and what makes people change their orders is a separate question.
What the book does not show
An order book is a snapshot. Orders can be pulled at any moment, and a large order can be hidden in whole or in part. In the US a stock also trades on many venues at once, so one venue's book is only part of the picture. How many rows you see depends on your broker and what data it shows. A long row of sellers does not mean the price cannot rise.
When many people want to trade, the rows sit close together and hold many shares. When few do, the prices sit further apart, and buying or selling at once costs more. That is called liquidity.
Test yourself
In the example above you buy 300 shares at once. What price do you get?