What is an Order Book in Trading?

Social Entrepreneurship

Understanding an Order Book

An order book in trading refers to a digital ledger used for organising and maintaining buy and sell requests for a specific financial instrument. The requests in the order are sorted by their price levels. 

Order book also displays another important trading parameter — market depth. It is the number of shares on a bid and ask at every price level. Market depth also helps identify the market participants placing the orders, though some still can remain anonymous.

The order book comprises three parts: buy and sell orders and order history. 

  • Buy orders are offers to purchase a specified amount of assets at the current price. 
  • Sell orders are asking prices for those willing to sell. 
  • Order history displays all past transactions. 

Four types of orders can be found in the order book:

A market order aims to immediately buy or sell an asset at the current market price.

A stop-loss order is similar to a limit order. When the asset price achieves the predetermined level, the trading platform automatically sells your shares and closes your position to prevent further loss.

A limit order enables a trader to buy or sell a financial instrument at a predetermined price.  A limit order is only fulfilled if the asset price reaches the specified price or exceeds it.

A trailing stop can be described as a dynamic stop-loss order. It automatically follows the asset quote towards an open trade at a specified distance and stops if the price reverses.

The order book is a tool that helps traders make more informed decisions. It allows them to see which brokerages are actively buying or selling stocks, giving them insight into whether retail investors or institutions drive market activity.