Among others, one of the terms you would often encounter is stock tick. What is a stock tick? How does it work? If you’re curious about the answer, this short guide has you covered.
While we’ll talk about the tick in the context of stocks, its applications go beyond such. For instance, the tick is also used when trading futures. Regardless, it has the same meaning.
What Is a Tick?
In a nutshell, a tick in securities refers to the minimum movement of an asset’s price. It can be upward or downward, depending on the direction of the price within the time period. More so, the tick can also refer to the price change from one trade to another.
The introduction of decimalization in 2001 made the minimum tick size one cent (.01) for all stocks that are trading over $1. Tick size refers to the smallest measurable amount by which the price of a stock can move.
Now, let’s also look at a tick size example. Let’s say the value of a stock is $50.55. It means that the next price level will be $50.54 or $50.56. The latter is based on the earlier assumption that the minimum tick size is $.01.
The visual representation of a tick is apparent in a tick stock chart. The latter will show the stock’s bid and ask prices. Nonetheless, the price chart is a more useful tool if you want to evaluate historical price data.
Another concept you must know is the tick stock indicator. It’s a market indicator of how many are going up or down in terms of price. The computation depends on the last trade of a specific stock.
What is a Stock Ticker Example
Tick and ticker can be confusing to newbies. Earlier, we already defined what is a tick in futures trading or stocks trading. However, one thing to note is that the earlier definition is different from a ticker.
A stock ticker is a symbol or code that represents a company in the stock market. Instead of writing the entire name of the company, it’s reduced to a series of letters. It shortens the name of the company as you see it on different platforms, such as the website of a brokerage.
Here are some examples of stock tickers:
- ABNB — Airbnb
- AAPL — Apple
- AMZN — Amazon
- NFLX — Netflix
- WMT — Walmart
How a Tick Works
When you’re looking at stocks, it’s a must to consider the value to the last cent. Such is especially crucial for trading, as it will determine the value at which you want to buy or sell. It will determine the change in price for every transaction.
If the tick size is higher than $.01, it means that the buy and sell orders must be at higher prices. For instance, if the current value of ABC is $50.55, a tick size of $.05 means that the next orders should and $50.6 and $50.5. Therefore, the tick is only $.01, so you can put prices that are closer to the current market value.
Back in the day, the tick is expressed as a fraction of a dollar. In the case of most stocks, it’s 1/16, which means that it’s $.0625.
It was in 2005 when the Securities and Exchange Commission ruled that stocks trading above $1 should have a tick of $.01. On the other hand, if it’s below $1, then the tick is expressed in increments of $.0001.
The tick size is important because it makes pricing more granular. Imagine if the tick is $1. This means that if the stock price is $1, then you can buy and sell only at $2, $3, $4, and so on. Hence, it’s better if the value is $.01, so you can trade at $1.01, $1.02, $1.03, and so on.
How to Calculate Tick Value
Calculating the tick value in stocks is easy. You just need to know the dollar and cents value of the asset and multiply it by the number of shares.
However, the computation for stock index futures is a bit more complicated. Nonetheless, we’ll not delve into that since we’re talking only about stocks.
Tick As a Movement Indicator
One of the ways by which you can use the tick is as a movement indicator. Meaning it will reflect the stock price’s movement or direction. In this case, there are two types of movements, which we’ll talk about below.
Uptick in Stocks
The movement in case of an uptick is self-explanatory. It means that the price of the stock has increased as against the previous transaction. So, if its price was $20.55, there’s an uptick when it rises to $20.56, which is an increase of $.01.
In some cases, the uptick is also called a plus tick. The latter is a reference to a plus or increase in price.
Aside from price, an uptick is also applicable in volume. An uptick volume means an increase in the number of shares. Technical traders use it for determining the net volume, which they compute by finding the difference between uptick and downtick volumes.
Downtick in Stocks
The downtick is the opposite of an uptick. It’s a movement indicator showing that the price is lower by $.01 than the previous trade. So, if the previous price is $20.55, there will be a downtick when the price becomes $20.54, which is a decrease of $.01.
Many people, especially amateur traders, may panic when they see a downtick. However, while it represents a reduction in price, it’s normal in the market.
There are several reasons why there can be a downtick. For instance, it can happen when supply is greater than demand. A company’s lower valuation can also influence such a movement.
A downtick does not necessarily imply poor performance or an economic disaster. Remember, it represents only a movement by a cent, so it shows fluctuations, which are natural in the stock market.
