Do you know that stock market trading is one place where every second counts and every small increment can mean the difference between profit and loss? Due to this, understanding tick size is crucial for traders as it affects how they plan their entry and exit points in the market. Now, what is tick size—the heartbeat of the market’s pricing rhythm?
It’s the foundation upon which you can shape your trading strategies.
What is Tick Size?
It is the smallest allowable price change between bid and offer prices on a trading platform. By establishing a minimum step for price adjustments, it helps maintain order in trading.
It refers to the smallest price movement a stock can make in the market. In simpler terms, it’s like the tiniest step a stock price can take up or down.
For example, if the Nifty TS is 0.05, it means the price can move by 0.05 rupees at a time. So, if a stock is trading at 100 rupees with a TS of 0.05, it can go to 100.05 or down to 99.95 in one move.
It matters because it helps traders understand how much a stock’s price can fluctuate in each trade.
An Example of Tick Size
Let’s say you’re looking at a stock called ABC Ltd. in the Indian stock market. Currently, ABC Ltd. is trading at 100 rupees per share.
Now, let’s imagine that the tick size for ABC Ltd. is 0.50 rupees.
What does this mean?
It means that ABC Ltd.’s price can move in increments of 0.50 rupees. So, the next possible prices for ABC Ltd. would be 100.50, 100.00, 99.50, and so on.
But let’s imagine that it was smaller, like 0.10 rupees.
In this case, the next possible prices for ABC Ltd. would be 100.10, 100.20, 100.30, and so on.
It basically determines how prices can move in the stock market.
Why does the Tick Size Matter?
It matters in the share market because it affects trading dynamics and investor decisions.
Here’s why:
Precision in Pricing
It provides clarity on the smallest price movement, helping investors know exactly at what price they can buy or sell shares. This precision is crucial for executing trades efficiently.
Liquidity Impact
It influences liquidity. The narrower one allows for more precise pricing, attracting more traders and increasing trading activity.
Higher liquidity generally means smoother trading with narrower bid-ask spreads.
Impact on Trading Costs
It affects trading costs. With smaller tick sizes, traders can execute trades at more favourable prices, reducing transaction costs.
Conversely, a wider may result in higher trading costs due to larger bid-ask spreads.
Fairness and Transparency
Standardised tick sizes promote fairness and transparency in the market, ensuring that all investors have equal access to pricing information and trading opportunities.
Order Execution
Traders need to be aware of it when placing orders. Orders that are not in line may not get executed immediately or may be executed at less favourable prices.
How do You Measure the Tick Size?
Tick size in the Indian stock market is measured in terms of the minimum price movement allowed for a particular stock.
It’s usually expressed in rupees and varies from stock to stock based on factors like stock price, volatility, and regulatory requirements.
For instance, let’s say a stock’s tick size is 0.10 rupees. This means that the stock’s price can only move in increments of 0.10 rupees.
Stock exchanges and regulatory bodies like the Securities and Exchange Board of India (SEBI) determine it. They aim to ensure orderly trading, prevent excessive volatility, and maintain fairness in the market.
Conclusion
This smallest price change in stock trading guides pricing accuracy and trading behaviour. In India, for example, Nifty’s TS could be as small as 0.05 rupees. Traders must match orders for smooth execution, shaping their strategies significantly.
FAQs| What is Tick Size
In Indian trading, the tick size is the smallest price increment by which the price of a security or contract can change on an exchange.
It is set by the exchange and is not calculated; for example, in the NSE, the tick size for equities is ₹0.05.
The tick size in option pricing is the minimum increment by which the price of an option contract can change, such as ₹0.05 or ₹0.10, depending on the contract.
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.