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My understanding of the bid and ask size is very limited, so my first question is...

What are some good books or videos that contain in depth info on how the bid and ask sizes work? ( surprisingly finding in depth info on the bid and ask size on Google is hard to do )

Here is some info I have found about what one can infer about the bid and ask sizes coupled with questions I have or why the info confuses me.

  1. A large bid size indicates a strong demand for the stock.

(This confuses me. Couldn't a large bid size mean more of the stock is selling off indicating lowering demand?)

  1. A large ask size shows that there’s a large supply of the stock.

(Wouldn't this only be true when measuring relative to outstanding shares? Could it also mean there is simply a large demand for the stock?)

  1. If the bid size is significantly larger than the ask size, then the demand for the stock is larger than the supply of the stock; therefore, the stock price is likely to go up.

  2. If the ask size is significantly larger than the bid size, then the supply of the stock is larger than the demand for the stock; therefore, the stock price is likely to drop.

(In regards to 3. and 4. is it really this simple? Are there cases when this is not true? What would be some other caveats when following these rules of thumb?)

  • 3 and 4: Well, 50% likely... I strongly suspect that in these days of electronic trading, by the time you hear about these numbers you've already missed the window in which they might be useful. – keshlam Nov 9 '14 at 19:00
  • 4
    Bids are requests to buy and asks are requests to sell is the part I think you are missing here. – JB King Nov 10 '14 at 0:03
  • As for 3 and 4, what you see as the posted bid and ask size is the current best bid and best ask. To get a better understanding of supply/demand, you need to look at level 2 which shows the depth of the order book. – Victor123 Feb 10 '15 at 19:56
  • For every sell there is a corresponding buy. – a CVn Jan 30 '17 at 15:46
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In the stock market many participants enter orders that are not necessarily set at the current market price of the stock (i.e. they are not market orders, they are limit orders). They can be lower than the market price (if they want to buy) or they can be higher than the market price (if they want to sell). The set of orders at each point of time for a security is called the order book.

The lowest selling price of the order book is the offer or ask, the higher buying price is the bid. The more liquid is a security, the more orders will be in the order book, and the narrower will be the bid-ask spread. The depth of the order book is the number of units that the order book can absorb in any direction (buy or sell).

As an example: imagine I want to buy 100 units at the lowest offer, but the size of the lowest offer is only 50 units, and there is not any further order, that means the stock has little depth.

2

The principle of demand-supply law will not work if spoofing (or layering, fake order) is implemented. However, spoofing stocks is an illegal criminal practice monitored by SEC. In stock market, aggressive buyer are willing to pay for a higher ask price pushing the price higher even if ask size is considerably larger than bid size, especially when high growth potential with time is expected. Larger bids may attract more buyers, further perpetuating a price increase (positive pile-on effect). Aggressive sellers are willing to accept a lower bid price pushing the price lower even if ask size is considerably smaller than bid size, when a negative situation is expected. Larger asks may attract more sellers, further perpetuating a price fall (negative pile-on effect). Moreover, seller and buyers considers not only price but also size of shares in their decision-making process, along with marker order and/or limit order. Unlike limit order, market order is not recorded in bid/ask size. Market order, but not limit order, immediately affects the price direction. Thus, ask/bid sizes alone do not give enough information on price direction. If stocks are being sold continuously at the bid price, this could be the beginning of a downward trend; if stocks are being sold continuously at the ask price, this could be the beginning of a upward trend. This is because ask price is always higher than bid price. In all the cases, both buyers and sellers hope to make a profit in a long-term and short-term view

  • This answer would be more helpful if you could tie each part to one of the OP's individual questions. – dg99 Feb 11 '15 at 17:00
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yes you are right as per my understanding while doing trade you must consider fol (specially for starters like me)

  1. The volume of the stock you are trading in should be high enough to keep you secure for quick in and out

  2. Whenever the bid volume is more than the ask volume the prices will move up and vice versa. to give an example if a stock is at 100 points and there are fol bids:

      Bid                  Ask
    1.99                1. 101
    2.98                2. 102
    3.97                3. 103
    

The transaction will occur when either the bidder agrees to pay the ask price (case 1. he pays 101 . his bid offer will disappear and the next best ask will be 102. and the current price will be 101 which was the last transaction.) or when the person giving ask price agrees to deal at best bid which was 99 in which case the share will go down.

  1. In this scenario as the market moves on indicators and rumors, then if there is a positive development more people(more volume) will try rather compete to buy same stocks, so therefore for less shares more buyers will be there which will result in stock prices to move up.

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