What Are the ‘Bid-Ask Spread’, Tick Size and Tick Value?
What are the ‘bid-ask spread’, tick size and tick value?
Introduction
In financial markets, the price of securities matter to investors, traders and market makers. As all parties enter the markets expecting to make profits, understanding the financial terms and its functions associated to the cost of buying and selling securities would be valuable to market participants.
Bid-Ask Spread
According to Curtis (2008, p. 1), “The spread is the difference between the bid and ask for a particular security.”
For stock transactions to occur, there has to be buyers and sellers. Due to the number of shares trading daily, supply and demand also determines the value of a stock, and the size of the spread (Curtis, 2008, p. 1).
Tick Size
As financial markets fluctuate, its prices would move according to its tick size (Milton, n.d., p. 1). Milton (n.d., p. 1) further stated, “A market’s tick size is the minimum amount that the price of the market can change.”
Also, according to Onnela et al (2008, p. 441), “Tick size is an important aspect of the micro-structural level organization of financial markets. It is the smallest institutionally allowed price increment, has a direct bearing on the bid-ask spread, influences the strategy of trading order placement in electronic markets, affects the price formation mechanism, and appears to be related to the long term-term memory of volatility clustering.”
Tick Value
Milton (n.d., p. 1) stated, “A market’s tick value is the cash value of one
Introduction
In financial markets, the price of securities matter to investors, traders and market makers. As all parties enter the markets expecting to make profits, understanding the financial terms and its functions associated to the cost of buying and selling securities would be valuable to market participants.
Bid-Ask Spread
According to Curtis (2008, p. 1), “The spread is the difference between the bid and ask for a particular security.”
For stock transactions to occur, there has to be buyers and sellers. Due to the number of shares trading daily, supply and demand also determines the value of a stock, and the size of the spread (Curtis, 2008, p. 1).
Tick Size
As financial markets fluctuate, its prices would move according to its tick size (Milton, n.d., p. 1). Milton (n.d., p. 1) further stated, “A market’s tick size is the minimum amount that the price of the market can change.”
Also, according to Onnela et al (2008, p. 441), “Tick size is an important aspect of the micro-structural level organization of financial markets. It is the smallest institutionally allowed price increment, has a direct bearing on the bid-ask spread, influences the strategy of trading order placement in electronic markets, affects the price formation mechanism, and appears to be related to the long term-term memory of volatility clustering.”
Tick Value
Milton (n.d., p. 1) stated, “A market’s tick value is the cash value of one