Tick Size: Definition, Conditions, and Examples in Trading

Tick Size: Definition, Conditions, and Examples in Trading

Investors should be familiar with a variety of phrases connected to online share trading in the financial markets. While it's possible to trade without fully understanding the details of the assets you're buying or selling, it's not really a good idea to be uninformed of the key terminology used in the markets. Tick size is one of the crucial ideas you should learn, although it's frequently disregarded.

Making better investing decisions may be aided by understanding tick size meaning and being familiar with it via the use of tick size examples. Without further ado, let's examine what tick size is in the share market and its significance. 

What is Tick Size? 

Tick size, in its broadest definition, refers to the smallest conceivable variation in an asset's price. A certain sum of money is assigned to the tick size or tick value. Additionally, it differs from one type of asset to another. The smallest price change for a trading item is referred to as a tick size. On the exchange, prices can go up or down, but they always do so in multiples of the tick size.

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Table of Content

  1. What is Tick Size? 
  2. The Origin of Tick Size
  3. Dependence of Tick Trading on Tick Size
  4. Tick Size Characteristics
  5. Example of Tick Size
  6. Conclusion 

The Origin of Tick Size

The idea of tick size has been around since the early days of stock trading, when transactions took place in physical locations known as trading pits. The minimal price adjustment that may be made was one of the regulations and customs that each pit had. The tick size was the term for this smallest price movement.

Due to the introduction of computerised trading, tick sizes are often substantially lower than they were previously. As a result, the current story claims that the term "tick" derives from the fact that each deal often only results in a little price movement known as a "tick."

The origins of tick size are a subject of much debate, but the fundamental goal of the tick size is still to offer more liquidity and avoid price manipulation. It is a crucial element of the market's framework. Regardless of the securities being traded, the tick size is a crucial indicator of price stability and aids in maintaining fair and orderly markets.

Dependence of Tick Trading on Tick Size

A price movement that is at least equal to the tick size is required for a tick transaction to take place. Finding a counterparty ready to trade at that price level may be difficult if the tick size is too large. 

As a result, the size of the tick has a direct bearing on the liquidity of the market and the traders' capacity to locate willing counterparties. The cost of trading is also influenced by tick size because larger ticks have higher transaction charges. Therefore, it is crucial to balance cost and liquidity when selecting a tick size for a certain investment.

These minor price changes enable some seasoned day traders and other short-term traders to quickly profit. Tick traders employ specialised software that enables them to swiftly place trades in order to produce more precise outcomes. They frequently trade on many exchanges to profit from minute price variations.

Tick Size Characteristics

  • A trading asset's minimal price change is represented by a tick.
  • Depending on the asset being exchanged, it varies.
  • It establishes the profitability of a tick deal.
  • For stocks with high prices, it is important.
  • Usually, the exchange where the securities are traded sets it.
  • The sizes of the ticks vary per security and exchange. For instance, the National Stock Exchange of India's (NSE) tick sizes for equities listed there range from INR 0.05 to INR 1.

Example of Tick Size

When purchasing or selling shares, the tick size is an essential factor. It is the smallest amount by which a security's price can move. For instance, if a stock has a tick size of Rs. 0.5, the price might change in Rs. 0.5 increments or decrements.  The following best bid prices for the stock are Rs.999.95, Rs.999.90, Rs.999.85, Rs.999.80, and Rs.999.75, assuming that the last traded price (LTP) was Rs. 1000. The tick size, in this case, is fixed at Rs. 0.05. Therefore, Rs. 999.87 cannot be the bid price.

The Securities and Exchange Board of India (SEBI), which regulates stock trading in India, has established the following Tick Sizes:

- Rs. 1 for shares of companies with a market value of more than Rs. 10,000 crore

- Rs. 0.5 for shares with a market value of between Rs. 4,000 and Rs. 10,000 crore.

- Rs. 0.05 for shares of companies having market capitalizations of less Rs. 4,000 crores

To provide sufficient market liquidity for all equities, different tick sizes are used for various stocks. For some of the less liquid equities, a big Tick Size would make it harder to locate buyers or sellers, resulting in greater bid-ask spreads and making it challenging for investors to trade these stocks. Thus, by allowing for a variety of Tick Sizes, SEBI ensures that the market has enough liquidity for all equities to trade at fair rates.

Furthermore, SEBI has stipulated that all equities listed on Indian stock exchanges must have a tick size of Rs. 2 per share in order to ensure that market orders are executed effectively and at the optimum pricing. In 2017, this regulation went into force after a phase-in period. SEBI seeks to increase market liquidity and reduce spreads by mandating tick sizes for all equities.

Conclusion 

Tick trading helps traders by providing more narrow spreads, faster execution, and more liquidity. Additionally, it is useful since it gives smaller investors better possibilities while ensuring that prices stay near their genuine worth. 

Consider utilising tick orders to trade stocks in India if you want to take advantage of these advantages. Use a trustworthy and user-friendly trading tool like blinkX trading app to make trading simpler and more convenient.  

what-is-tick-size

Yes. A seasoned investor would not ignore this character despite the fact that the tick movements, size, and value are not something one would see every day because it is crucial for forecasting and analysis of asset movements.

Regulatory agencies or exchanges decide on tick size depending on variables such as market liquidity, price range, and trading volume.

No, various assets and even different trading venues for the same asset might have different tick sizes.

Tick size has an effect on trading expenses since it establishes the minimal price change necessary to execute a deal.

Market volatility does get impacted by the tick size.