Investors should be familiar with many terms that are related to trading on the financial markets. It is possible to trade without knowing all the details of the assets you are buying or selling. However, it is not a good idea to be ignorant about the essential terminology related to markets. Tick size is one of the most important concepts you need to understand.
You can make better investment decisions by understanding the meaning of tick size and looking at tick size examples. Let's now look at tick size.
Tick size, in its broadest sense, is the lowest possible fluctuation in an asset's price. A tick size, or tick value, is a measure of how much money an asset is worth. It varies from one type of asset to the next. The tick size is the minimum price movement for a trading asset. Although the price of an asset can fluctuate between upward and downward on an exchange, it will always move in multiples the tick size.
Stocks were initially traded on the floor at the NYSE before electronic trading . Traders would still buy and sell stocks in person prior to the advent of electronic trade . Stock prices fluctuated by 1/8th and 1/16th of dollars back then. They could move up or down by $0.125, $0.0625 or $0.0625 per share. Stock prices can fluctuate by as little as a few cents.
Trading was a way for traders to profit from minor changes in stock prices. Trader could scalp the price movements by knowing the minimum amount a stock can move by. Tick size is an old concept. Since ancient times, traders have used tick size to determine the minimum amount a stock could move by.
Tick size is a universal concept for all assets, including stocks, options and futures. For example, if you don't know the tick size for the futures contracts you are trading, you could unknowingly trade a position that is either too high or low relative to your trading objectives. Because the price of each futures contract is different from other futures contracts, this can happen.
One futures contract could move 200 ticks, while the other may move 50 ticks during a particular trading period. Both futures may trade at Rs. 40 and Rs. 42 and 40 respectively. You may believe that the tick sizes of these assets, which trade at similar prices, could cause similar fluctuations. You'll be able to see that one asset moves faster than the other once you know the tick size. This is an important factor in how you make trading decisions.
A tick size example can help you understand the practical implications of this concept. Let's say that a stock has a tick-size of Rs. 0.10. Let's say that it was the last time it traded at Rs. 100 Based on these numbers, the ideal stock price may be Rs. 99.90, Rs. 99.90, Rs. 99.80, Rs. Say Rs. 99.84 is inconsistent and invalid because it doesn't meet the tick size.
The tick size will also determine the offer prices. These values would be Rs. 100.10, Rs. 100.10, Rs. 100.20, Rs. If there are no bids at any level, the price that comes in at the next tick size will be taken into consideration. If there are no bids above Rs. 99.90 will be the next bid price. 99.80 will be the highest bid price. The same applies to the offer price.
As you can see, the value of a tick can influence whether you place the right offer or bid on an exchange. This is why you need to be aware of this metric. You could place unwise offers or bids, which can lead to poor trading results. Make sure to account for tick size when you trade assets on or off the exchange.