Tick Size in Trading: Understanding the Smallest Price Movements
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.
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