What Is Depth of Market (DOM)?
Let me explain what Depth of Market, or DOM, really is. It's a straightforward measure of supply and demand for liquid, tradeable assets, based on the number of open buy and sell orders for things like stocks or futures contracts. The more orders there are, the deeper and more liquid the market becomes.
You might also hear DOM data referred to as the order book, since it's essentially a list of pending orders for a security or currency. This data determines which transactions can proceed. Most online brokers provide DOM data for free or a small fee, so you can access it easily.
Understanding DOM
DOM measures real-time supply and demand, which traders like you use to gauge the likely direction of an asset's price. It also helps you figure out how many shares you can buy without pushing the price up significantly.
If a stock is highly liquid, it has plenty of buyers and sellers, so you can purchase a large block without much price movement. On the other hand, if it's not very liquid, trading doesn't happen as often, and buying a big chunk could noticeably affect the price.
You'll typically see DOM displayed as an electronic list of outstanding buy and sell orders, sorted by price level and updated in real-time. A matching engine handles pairing up compatible trades. Most online brokers offer some DOM display, letting you view the full list of pending orders and their sizes, not just the best ones.
Key Takeaways
- Depth of Market (DOM) indicates current interest in a stock or asset.
- It signals the likely direction of a stock's price.
- You can use it to judge the best time to buy or sell.
How to Use DOM Data
DOM data shows you where a security's price might head soon as orders get filled, updated, or canceled. You can use it to check the bid-ask spread and current volume for a stock.
Stocks with strong DOM are usually popular large-cap companies like Apple (AAPL). They have high volumes and liquidity, so you can place large orders without much impact on prices. In contrast, securities with weak DOM are often obscure small-cap companies, where a single large order could move the price a lot.
Remember, the most popular stocks generally have greater market depth than those of lesser-known companies. Viewing DOM in real-time lets you profit from short-term volatility. For instance, during an IPO, you can monitor DOM to buy or sell when demand hits the right level.
Example of DOM
Suppose you're tracking the DOM for Stock A, currently trading at $1.00. There are 250 offers at $1.05, 250 at $1.08, 125 at $1.10, and 100 at $1.12. On the lower side, 50 offers at $0.98, 40 at $0.95, and 10 each at $0.93 and $0.92.
From this, you might see that Stock A is trending higher. With that insight, you can decide if now's the time to buy or sell.
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