Investors should know several terminologies associated with trading within the financial markets. While it is possible to trade without knowing every detail of the assets you are purchasing or selling, it is not a good idea to be uninformed of the important terms connected with the markets.
Tick size is the minimum amount by which the price of a security can change. Stock exchanges establish tick sizes, which vary based on the magnitude of the financial instrument and market requirements. Tick sizes in trading enable optimal liquidity and narrow bid-ask spreads. So when it comes to investing in the stock market, investors should be aware of the tick size meaning.
Tick size and tick trading can significantly impact stock prices and market liquidity. For instance, if a stock is trading at ₹10 per share, and the tick size is ₹0.01, then the stock can only be traded in increments of ₹0.01. This means the stock price can only go up or down in $0.01 increments.
If you’re wondering what tick trading means, it refers to buying and selling stock in small increments or ticks. If tick trading is allowed, traders can buy and sell the stock in small increments, which can impact the stock price. For example, if a stock is trading at ₹10 per share, and the tick size is ₹0.01, then a trader can buy 100 shares for ₹10 and then sell them for ₹10.01. This would impact the stock price and lead to more market volatility.
What is tick size?
In the stock market, the tick size is the minimum amount by which the price of a security can change. The minimal price shift of a trading item in a market is called tick size. Distinct trading instruments have different price movements, with tick sizes denoting the smallest amount they may shift upwards or downwards on an exchange.
Tick size influences investors’ pricing when buying or selling shares. It effectively defines the proportion by which the price of a share can vary with each transaction.
For example, if a share has a tick size of Rs 0.04 and the last traded price (LTP) is Rs 100, the next five highest bid prices for the stock are Rs 99.94, Rs 99.89, Rs 99.84, Rs 99.79, and Rs 99.74. In this case, the bid price can’t be Rs 99.85 since it does not satisfy the tick size of Rs 0.04.
Tick size is a notion that applies to all assets, including stocks, futures, options, and more. If you don’t know the futures contract’s tick size, you may accidentally take a trading position that is either too high or too low concerning your trading aim. This happens because the cost of each futures contract varies by a different amount from comparable futures contracts.
Tick size regulations vary among financial markets. For instance, the smallest tick size a rate of exchange may change in the Forex market is known as a pip, reflecting the fourth decimal point of an exchange rate. A pip can also be seen on the second decimal point in some currency combinations that contain the Japanese yen.
Why does the tick size matter?
Why is tick size important? Well, if you’re an investor who likes to buy and sell securities quickly, then you need to be aware of the tick size to ensure that you’re getting the best price for the deposit. If you’re unaware of the tick size, you could pay more for the security than you need to.
For example, during a trading session, one futures instrument may fluctuate by 150 ticks, whereas another might move by 100 ticks. Assume both of these futures are trading at Rs. 50 and Rs. 40.
Without understanding the tick size, these two securities, which trade at comparable prices, will likely see similar variations. However, if you know the tick size, you’ll see that one item travels faster than the other. This element has an impact on how you make trading judgments.
So, if you’re an investor, ensure you know the tick size for the securities you’re interested in. It may help you save a lot of money in the long run.
Conclusion
Tick size is an old term, and for centuries, individuals trading on stock markets and other exchanges have attempted to profit as the price of assets moved across the tick size.
Individual investors should be aware of the tick size of the assets they purchase. Recognizing the tick size will allow you to estimate the change in a security’s value if you understand how many ticks it generally moves throughout a period.
Now that you understand how the tick value might assist you in making the correct offer or bid on an exchange. This is why it’s necessary to keep track of this measure. Otherwise, you risk making rash bids or offers, which might lead to bad trading results. So, the next time you trade any asset on the market or elsewhere, make sure you account for tick size in your trading decisions.
