Term · Liquidity & Trading
Market Impact
In briefMarket impact is the price movement that an order triggers through its own volume. For illiquid small stocks it can be high, so large positions can only be built up or unwound at prices considerably worse than the last quote.
Definition
Market impact refers to the price movement that an order itself triggers through its volume. The larger the order relative to the available trading volume, the more it shifts the price to the disadvantage of the party executing it. The effect is a central component of implicit trading costs and arises in addition to the bid-ask spread.
How it is calculated
Formula. Market impact ≈ (Execution price − Reference price before order) ÷ Reference price before order × 100 %
Why it matters for small caps
For nano and micro caps with a thin order book, even a medium-sized order can move the price noticeably, so the quoted market price is not achievable for larger positions. Market impact thereby effectively limits the investable position size.
Common misreadings
- Market impact is often confused with the bid-ask spread, even though it describes the additional price shift caused by one's own order volume and not the permanently quoted spread.
In the process
Frequently asked
How does market impact differ from slippage?
Slippage is the total difference between the expected and actual execution price; market impact is the sub-component of it caused by the volume of one's own order.
How can market impact be reduced?
By splitting large orders into smaller partial orders over time, using limit orders, and aligning with metrics such as average daily volume.
Is market impact especially relevant for micro caps?
Yes, because low trading volume means that even small order sizes can have a disproportionate price effect.
Related terms
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.