Bid and ask size (B/A size) can be a very important indicator of whether you are trading, or investing and placing an order. B/A size provides investors and traders information on the liquidity and how the stock might move in the short term. It tells you exactly how many orders are at a certain threshold and you can use this as a trading indicator.
In this article, we will analyze what is bid size and ask size, and how you can take advantage of this information to improve your trading and order execution.
What is the bid size?
The bid size represents how many orders are placed for the highest amount investors are willing to pay for a certain stock, in real-time. The bid size works in lots of 100, so if there is a 100 bid size, that means that the market participants want to buy 10,000 shares of that stock at the bid price.
What is the ask size?
The ask size is the opposite of the bid size, in the sense that it represents the amount of shares holders of the stock are willing to sell at the current ask price. Similar to the bid size, the ask size also represents orders of 100 shares each.
Understanding the difference between bid size and ask size
The bid size represents the number of orders investors are willing to execute at the highest price.
The ask size represents the number of orders investors are willing to execute at the lowest price.
The B/A size is one of the most important indicators for day traders because it allows them to understand short-term price movements. The bid-ask size can be similar, or it can be very different.
If the bid size is much larger than the ask size then that is a bullish indicator. Conversely, if the ask size is larger than the bid size, it means that the price could go down in the short term.
Due to its importance in determining price movements, B/A size is commonly used in trading, but it also has its shortcomings. Although you can identify the number of orders at the higher price for buyers, and the lowest price for sellers, there are many other orders that are not reflected in the bid-ask size.
What B/A size can indicate
The B/A size is often a great measure of liquidity for any asset, and it is also a great way for traders to understand how the price of an asset could move in the short term. Here is what the B/A size can tell you:
- Price movements
- Size of the market
The bid-ask size can give traders and investors insights into where the price of a certain asset is moving. If the size of the bid is larger than the ask, that usually means that the price will go higher. Since there are more buyers at the highest price than sellers.
In the same way, if the ask size is larger than the bid size, the price will most likely be lower. Although it is difficult to predict stock prices, by comparing the size of the bid and ask we can have a better idea of where prices are moving.
The B/A size also allows investors and traders to analyze the liquidity of a certain asset. If the bid-ask size is a fairly low number, that means that the asset is illiquid. This will also be reflected in the bid-ask spread.
Illiquid assets will have lower B/A size and wider bid-ask spreads. On the other hand, highly liquid securities will have a larger bid-ask size and a narrow bid-ask spread.
Size of the market
Lastly, the bid-ask size can also reveal the size of a certain market or market depth. This shows if the market is able to receive large orders or not, which may influence its price in the short term.
A large B/A size will often indicate that the market has a lot of depth, and therefore you can easily place a large order. If not, you might have to break up a large order into smaller orders. Otherwise, you run the risk of pushing the price up, since the bid size will be far larger than the ask.
How do you read bid size and ask size?
The bid-ask size is displayed in lots of 100 shares for stocks. This means that if the bid size is 100, the orders at the bid size represent a total of 10,000.
Reading the ask size is similar. So if the ask size is 100, there will be 10,000 shares trying to be sold at the ask price.
What is a good bid-ask size?
A good B/A size tends to be very large, indicating a large market depth, and higher liquidity. This is extremely important for investors because even a small order to buy or sell illiquid security can push its price by a significant order of magnitude.
Therefore, if you are looking to trade a certain stock, make sure that the bid-ask size is large enough.
What if the bid size is larger than the ask size?
Every time a stock goes up, its bid size is larger than the ask size. For the price of a stock to go up, you need more buyers than sellers at the current price. This is exactly what a bid size larger than the ask size represents.
What if the ask size is larger than the bid size?
This happens when there are more sellers than buyers at the market price. Eventually, this will push the price of the stock down.
Should I Buy At Bid or Ask Price?
If you want to execute your order faster then the best solution is to buy at the ask price. If you place a limit order with the bid price, your order might not get filled. There are other buyers at that level, and their orders might be executed before yours.
This is why it is important to understand the clear differences between market orders and limit orders. A market order will execute at the current market price, which is the ask price. While if you use a limit order you can choose the price you want.
We have seen how important bid-ask size can be for both traders and investors. Not only will you be able to tell where the stock is moving in the short term, but also gives you a good idea of the liquidity of the asset.
There are plenty of ways to use this information and incorporate it into your trading or investing strategy.