Tick Size [CapiPedia]

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======Tick Size======
Tick Size (also known as the 'minimum price increment') is the smallest possible price movement a security can make on an exchange. Think of it as the financial market's equivalent of a penny or a cent. If a stock is priced at $50.00 and has a tick size of $0.01, the very next price it can trade at is either $50.01 or $49.99—and nothing in between. You won't see it trade at $50.005. This standardized increment applies to various financial instruments, including [[stocks]], [[options]], and [[futures]]. Exchanges set these rules to create a more orderly and transparent marketplace, preventing a chaotic free-for-all of bids and offers at infinitely small fractions. For investors, the tick size directly influences the [[bid-ask spread]], which is the gap between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. A smaller tick size can lead to a tighter spread, which is good news because it can reduce your trading costs.
===== The Nuts and Bolts of Tick Size =====
==== How It Works in Practice ====
The concept is simple, but its application varies. The tick size for a security depends on the asset type, its price, and the exchange it trades on.
  * **For U.S. Stocks:** For most stocks trading above $1.00 on major exchanges like the [[New York Stock Exchange]] (NYSE) or [[Nasdaq]], the standard tick size is $0.01 (one cent). This is a result of a process called "decimalization" that occurred in the early 2000s, moving away from the old system of pricing in fractions like 1/8th or 1/16th of a dollar.
  * **For Other Assets:** Other markets have their own rules. [[Futures]] contracts, for example, have tick sizes that are unique to each contract. A tick in a crude oil contract might be $0.01, representing a $10 change in the contract's value, while a tick in an S&P 500 E-mini futures contract is 0.25 index points, representing a $12.50 change.
The key takeaway is that tick size creates a standardized ladder of prices. Every buy or sell order must land on one of these "rungs," ensuring that price movements are predictable and uniform.
==== Why Does Tick Size Matter? ====
While it might seem like a tiny detail, tick size has a surprisingly large impact on market dynamics. It's a key ingredient in the recipe for market [[liquidity]].
Regulators and exchanges are constantly trying to find the "Goldilocks" tick size—not too big, not too small.
  * **A Smaller Tick Size:** Can lead to narrower bid-ask spreads. This is generally great for investors as it lowers the cost of entry and exit. However, it can also reduce the incentive for [[market makers]] to provide liquidity, especially for less-traded small-company stocks, as their potential profit on each trade is smaller.
  * **A Larger Tick Size:** Can create a wider bid-ask spread, making it more profitable for market makers to trade a stock, which can theoretically encourage them to provide more liquidity. However, this wider spread acts as a higher transaction cost for investors.
In the U.S., regulators even ran a "Tick Size Pilot Program" to experiment with a larger tick size ($0.05) for certain small-cap stocks to see if it would improve their trading liquidity. The results were mixed, proving that there's no one-size-fits-all solution.
===== The Value Investor's Takeaway =====
So, should a [[value investor]] lose sleep over tick sizes? Absolutely not.
Your focus should always be on the big picture: finding wonderful businesses and buying them at a significant discount to their [[intrinsic value]]. Whether you buy a stock at $20.01 or $20.02 because of the tick size is largely irrelevant if you believe its true worth is $40.00. Arguing over ticks is like meticulously polishing the chrome on a car while ignoring that the engine is missing.
However, understanding tick size is part of being a well-informed investor. It helps you appreciate the subtle, "frictional" costs of investing. The bid-ask spread, influenced by the tick size, is a real cost that eats into your returns over time. Being aware of it reinforces the value investor's creed of being a patient, long-term owner, not a hyperactive trader. Frequent trading means you cross the bid-ask spread repeatedly, letting those little ticks nibble away at your capital.
In short, know what a tick size is, appreciate its effect on your trading costs, and then get back to the real work: analyzing businesses. **Don't let the noise of the market's ticks drown out the signal of a company's true value.**