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Tick Size in Trading: Understanding the Smallest Price Movements

derivatives tradingfuture and optionsfutures and options trading
18 Aug 20236 mins readBy MOFSL

Introduction

  • Accuracy is crucial in the trading world, where fortunes are made and lost with every tick.
  • That's why exchanges and authorities always try to upgrade their trading environments with innovations.
  • Tick size is one of the preventive measures introduced to facilitate traders.
  • Let's discover all about tick size and learn its importance in trading.

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What is Tick Size?

  • The term 'tick size' refers to the minimum price movement by which the price of a financial instrument can change in a market.
  • The instrument's price can go up and down by tick size only.
  • It includes instruments such as stocks, commodities, or currencies, where you can see the implementation of tick size.
  • To put it simply, it's the minimum fluctuation that can occur in the price of a commodity or stock.

An Example of Tick Size

The following example will help explain the tick size in trading:

  • Let's say a stock is currently trading at Rs. 2000 and its tick size is Rs. 0.50.
  • Its tick size of Rs. 0.50 indicates that the stock will only fluctuate by Rs. 0.50.
  • So, if the stock increases, it will be Rs. 2000.50, Rs. 2001, Rs. 2001.50, and so on.
  • Similarly, if the stock price decreases, it will be Rs. 1999.50, Rs. 1999, Rs. 1998.50, and so on.
  • It doesn't mean that the fluctuation of Rs. 0.30 or Rs. 0.40 is not there.
  • However, this fluctuation will not reflect on the exchange, as it will take a minimum of Rs. 0.50 of change to reflect on the exchange.

What are the Benefits of Tick Size in Trading?

Tick size has several benefits for traders. It plays a vital role as an extra precaution in trading regarding high-volume trading or the trading of expensive stocks. Here are some of the benefits of tick size:

  • It prevents unnecessary fluctuations by making the prices of highly-priced stocks easy to understand.
  • It helps traders buy and sell stocks at specific price levels.
  • It also keeps control over trading costs. This helps keep the stock market organized.
  • It maintains fairness and efficiency in trading and doesn't allow for any unethical advantage for any particular player.

Wrapping Up

  • Tick size is an important parameter set by the exchange or regulatory authorities.
  • It usually varies from one stock to another.
  • Tick size helps you enhance your trading experience.
  • To stay ahead of the competition, join Motilal Oswal and unlock powerful tools to elevate your trading skills.

 

Related Articles: Swing Trading Vs Position Trading What Does a Paper Umbrella Candlestick Indicate | How to Find Stocks to Swing Trade | Ultimate Guide to Positional Trading

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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