Home/Blogs/What is Tick Size in the Stock Market? Definition, Importance, Impact, and Example

What is Tick Size in the Stock Market? Definition, Importance, Impact, and Example

stock market
20 Jun 20246 mins readBy MOFSL

Introduction

Stock market trading holds some trading concepts that can help you to book immense profit in the market. Tick size in stock trading is another similar concept that plays a vital role in determining the bidding price of an asset.

While investors seek to rely on the tick size of stock, it varies from stock to stock. Let us understand tick size in detail, its importance in the stock market, and its impacts, along with an example.

What is Tick Size?

In the stock market, every stock has its own listed price. Tick size is the minimum price change between different bids for a particular asset traded on an exchange platform. In other words, tick size can be defined as the minimum price difference for an asset between successive consecutive bids and offer prices.

Say, if the tick price of a stock in the stock market is Rs X, then the successive consecutive bids for that stock can be either incremented or decrement with Rs X. On a broader scale, this will ultimately impact the buying, selling, and overall trading decisions of traders in the market.

Importance & Impact of Tick Size in Stock Market

Tick size is of great importance in the stock market. Specifically, for active traders, tick size may create a major difference in profit booking in the stock market. It is because, in the stock market, tick size plays a significant role in influencing a particular stock's liquidity, transaction costs, and market dynamics. 

If the tick size of a stock is higher, it will increase the stock's liquidity and enhance its market depth. This will encourage many investors to buy the stock at various bidding levels. As a result, the stock will be more stable and less volatile. 

On the contrary, if the tick size of a stock is smaller, it will lead to more precise price discovery. This will benefit low-cost traders, but it can make the stock more volatile and less stable.

Tick size can highly influence stock trading based on the length of a particular stock. Hence, it is essential for the stock market.

Exchanges often try to set minimum tick sizes for any particular stock in the market. This is because tick sizes are responsible for maintaining an orderly market. Therefore, setting them to the minimum price range possibly causes less volatility in the market since there are too many price movements but in small increments.

Tick Size Examples

Tick size is always set by the exchange where the stock is traded. While the tick size depends on various factors, there is a standard formula to predict the tick size up to some accuracy. The formula includes multiplying the minimum price increment of the stock with the exchange’s factor. 

Let us understand how the tick size of a stock influences its successive consecutive bids with an example.

Stock A has a tick size of 0.10, and it last traded on the stock market for Rs 100. In such a case, the successive consecutive bids for this stock shall be Rs 99.90, 99.80, and so on. Since the tick size of the stock is 0.10, there cannot be any other bid price than one with a difference of Rs 0.10. However, in the above example, the tick size of the stock resulted in a decrement in its cost, but it could also have increased the stock price as an option. 

​​​​​​​Conclusion

To sum up, tick size is a crucial factor for active traders. It helps you make accurate bids on stocks and achieve significant profits, making it essential to constantly monitor. Tick size matters in the stock market as it determines a stock's liquidity, market dynamics, and transactional costs. The tick size of a stock influences traders' willingness to invest, highlighting its great importance.

 

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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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