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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