Tick Size

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Tick Size Meaning

The tick size in stock market refers to the minimum price change in a financial instrument from which it can be inferred that there is a price increment or decrement in the asset's value. The main purpose of this parameter is to identify and predict price movement.

Tick Size

Investors should be aware of tick moves as all investments have no universal value. It varies depending on the security and country. Though it is mostly expressed in currencies of respective countries, pips and basis points are also accurate measurements for certain financial instruments.

Table of contents

  • Tick size can be defined as the smallest denomination of price movements allowed for a particular financial security.
  • It is the minimum value by which the asset price can change.
  • Even though it is known as minimum price increments, it also measures price decrements in asset value.
  • Tick movements in trading are important if an investor or an asset manager wants to gain a technical understanding of the stock market and its movements. It is relevant for stocks, bonds, futures, and foreign exchange markets.

Tick Size In Share Market Explained

Tick size in the stock market is one of the many parameters investors look for in their securities. Therefore, it is an important marker in investing. Earlier, these changes used to be determined as 1/8 or 1/16, or even 1/32 of the stock price. Though the concept can seem complex initially, it answers the question, "How do you know the asset price is changing?"

A change in asset price can be noticed when an increase or decrease occurs. So, if its value falls from $20 to $20.05, there is an increase. Similarly, if the price rises to $20.000009, it is still an increase. But how often does one come across a stock price such as $20.000009? Never. This is because of the tick size. The smallest tick size as of now is a penny or a cent. Therefore, if there is a change of $0.01, the investor will notice it.

But this $0.01 does not apply to all the financial instruments. Some investments have a minimum price increment of 5 cents, 50 cents, 1 dollar, 10 dollars, etc. Future's tick sizes are usually as large as dollars. Some futures contracts have a tick move in $5 or $12.5. However, this does not imply that the minimum price increment can only be measured in dollars, cents, or other currencies.

In the foreign exchange market, the currency movements are determined in pips. Pips are percentages in point, also known as a price interest point. It is equivalent to 1/100 of 1% or 0.0001. Thus, if the exchange rate of a certain currency pair is 3.4552, it can be expected to move to either 3.4553 or 3.4551.

Importance

Let's see how the minimum price investments become significant in trading.

Before investing, the investor should be aware of the tick size of the instrument. Since investing is not just about putting money into an asset, it is also about studying its movements in the market; tick moves will show if or when the investor should buy or, most importantly, sell an asset.

This is because the tick move is directly proportional to price changes. For instance, an investment with a size of 5 cents showing negative movement will have a different impact than an investment with 5 dollars tick move. Therefore, the larger the size, the larger the price movements. Hence, investors should beware if the price moves downwards, as they could face potential losses.

If an investor understands the tick move, they can predict the direction and movement of the instrument. As is common knowledge, forecasting is the backbone of investing.

Examples

Let us consider the examples given below to understand the concept better:

Example #1

Jake invested in a stock with a minimum price increment of 50 cents. One day, the stock was priced at $50. The next day it fell to $49.50. Then, it further fell to $49. Jake decided to sell the stock when the price fell to $47.50. This is because a tick size of 50 cents is significant considering the stock price, and the decision is based on his prediction.

Example #2

Here are recent proposals by the Securities and Exchange Commission on December 14, 2022, regarding tick moves. According to the SEC, the minimum price increment will apply consistently to trading and quoting instead of only the latter, as is done currently. Another proposal is narrowing down the minimum price increment to sub-penny levels. In 2005, the smallest tick size was 1 cent (1 penny). However, it is outdated concerning the current stock market. Under the proposal, securities will be allowed to have a minimum price increment of half a penny, equivalent to $0.005.

Ticks Size vs Tick Value

The concepts of tick value and size can be pretty confusing. But let's understand the distinction with the help of a few examples.

The main difference is that tick size is the price movement per unit instrument. Whereas the tick value is the total profit or loss (price change) from the total quantity of a particular instrument. Therefore, it's like saying that if the profit on a single apple is $1, then the total profit on a basket of 10 apples is $10.

For example, the tick size of a particular share is 5 cents. If an individual holds 100 shares (from the same company), the tick value is (5 cents x 100 shares) = 500 cents or $5. Now, consider the real-life example of NYMEX WTI Crude Oil. Its tick is 1 cent with 1000 barrels per contract. Therefore the tick value is (1 cent x 1000 barrels) = 1000 cents or $10.

Frequently Asked Questions (FAQs)

How to calculate tick size?

The minimum price increments are not calculated per se. Instead, they are measured as the smallest price change an asset can display. This usually depends on the type of investment, and there is no standard value. For example, the futures tick size of the E-mini S&P 500 is Ā¼ of its index point. Since the value of the index point is $50, the size is $12.5.

What is the minimum tick size?

A tick is the minimum price change of an instrument in the stock market. The tick size is $0.01 or 1 cent for most cases in stock trading.

Does tick size matter?

Yes. Though the tick movements, size, and value, are not something one would come across every day, an experienced investor would not overlook this parameter, as it plays an important role in analyzing asset movements and making forecasts.