Traders and investors often come across terms when trading that seem technical, which is crucial to understand. One such term is tick size in share market. Whether you're a beginner trying to learn the ropes or an experienced trader learning to better your strategies, understanding what is tick size is will help you make better-informed trading decisions.
In this blog, we'll explain the meaning of tick size, its role in the stock market, and why it matters to your trading strategy.
What Is Tick Size?
Simply put, tick size in stock market is the smallest possible price movement of a trading instrument on an exchange. It refers to the minimum increment by which the price of a stock or security can change, either upward or downward.
For example, if the tick size is ₹0.05, it means the stock price can move in multiples of ₹0.05 - such as ₹100.00, ₹100.05, ₹100.10, and so on. The price cannot move by ₹0.03 or ₹0.07 - only by the defined tick size.
Why Is Tick Size Important in Stock Trading?
When you trade with the understanding of what is tick size it affects how orders are placed, how trades are executed, and how much profit or loss a trader might make on a trade. Here's why tick size is important:
Liquidity and Market Efficiency:
A larger tick size can improve liquidity and simplify order books because of fewer price points. On the other hand, a smaller tick size allows for tighter spreads and more precise prices.
Bid-Ask Spread
Tick size directly impacts the bid-ask spread – the difference between the price buyers are willing to pay and the price sellers are willing to accept. Smaller tick sizes generally result in narrower spreads, benefiting active traders.
Execution Costs
Traders using high-frequency strategies or large orders may find that the tick size significantly influences their cost of execution and profitability.
Market Structure and Fairness
Exchanges often define tick sizes based on the liquidity and volatility of a stock. This helps maintain fairness and efficiency in trading.
Tick Size in the Indian Stock Market
In India, the exchanges like NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) define ticket sizes. The tick size is ₹0.05 for most stocks in the equity segments. However, for derivatives or other instruments like commodities or currency futures, it varies.
For example:
Equity stocks: ₹0.05
Derivatives: ₹0.05 (standard for futures and options)
Currency futures: ₹0.0025
Commodity contracts: Varies based on the product.
Thus, understanding tick size while trading is essential for every trader, especially those working with multiple asset classes.
Tick Size and Tick Charts
In the world of technical analysis, tick charts are used to track market movements based on the exact number of trades, rather than fixed time intervals.
So, what's the connection?
Tick charts do not reflect tick size directly. When you understand tick size it can help interpret tick chart trading more accurately. A tick chart records a new bar or candle after a set number of trades (e.g., every 100 trades), which provides a unique insight into intraday activity and volatility.
If you want to know how to read a tick chart, it's important to understand the volume of trades and price fluctuations. Tick size helps define the smallest movement within each of those trades.
Real-Life Example of Tick Size in Action
Let's say you place a limit buy order for a stock currently trading at ₹150.03. If the tick size is ₹0.05, you will need to round your order to the nearest tick - ₹150.00 or ₹150.05.
This rounding rule means your buy or sell order can only be placed at valid price levels that follow the tick size increment.
Intraday traders and scalpers who work with minor price fluctuations to make profits find this an important.
Tick Size and Trading Strategy
Here's how the tick size helps with different trading strategies:
- Scalping: An investor who makes several investments throughout the day relies on small price changes. Knowing the tick size helps judge if those small changes are tradable.
- Algorithmic trading: Algorithms factor in tick size to determine optimal entry and exit points.
- Options trading: Since option prices also follow tick size rules, traders need to consider it while building spreads or calculating breakeven points.
In essence, tick size in stock market trading can shape your entire approach, from how you place your trades to how you interpret charts.
Conclusion
If you're looking to invest in the market, understanding what is tick size is fundamental to becoming efficient and informed while investing. You can be dealing with equities, derivatives, or even tick charts for technical analysis. Tick size has a critical role in determining price movement, trade execution, and market liquidity.
As you build your trading strategies, make sure to factor in tick size for accurate order placement and risk management.
Explore trading opportunities and learn more about market mechanics on Indiabulls Securities Limited (formerly known as Dhani Stocks Limited).
