The order book

You read that a share is worth ten euros. In reality, there is not one price, but two. And a long queue.

That queue is the order book. On one side, those who want to buy. On the other, those who want to sell.

Each one states a price and a quantity. Buyers want to pay as little as possible, sellers to sell as high as possible.

Say: the best buyer offers ten euros. The best seller asks ten euros and five cents.

Between the two, there is a five cent gap. That is the spread. As long as nobody gives way, nothing trades.

If you buy then sell straight away, you lose this spread. On one thousand shares: fifty euros.

A heavily traded share has a tiny spread. A small, little-followed stock, a much wider one.

The displayed price does not tell everything. You also need to know how many shares wait at each price. That is depth.

For the example: two hundred shares at ten euros five. Three hundred at ten euros ten. Then one thousand at ten euros thirty.

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You want six hundred shares, right now. You take the first two hundred, then the next three hundred, then one hundred higher up.

Total: six thousand and seventy euros, instead of six thousand and thirty. Forty euros more, just because the book was thin.

Your own purchase pushed the price up. A deep book absorbs big orders. A thin book makes you pay for them.

What you just placed is called a market order. You choose speed. The price, you put up with.

The other choice is the limit order. You set a maximum price, and wait for a seller to accept it.

You control the price. But you risk never being filled, if the market moves away.

Speed or price: that is the whole trade-off. On a thinly traded stock, a market order can cost a lot.

And big investors? They have a problem: if they show everything they want to sell, the price collapses before they start.

So they use the iceberg order. Say five thousand shares to sell, of which only one hundred are visible in the book.

As soon as the hundred are sold, another hundred appear. The rest stays hidden below the surface.

So the book you see is never quite the real one. There are orders that are not shown.

Remember three things. A price is two prices and a gap. A quantity counts as much as a price.

And before buying, ask yourself what matters most to you: being filled fast, or being filled at the right price.