Understanding the Difference Between Points, Pips, and Ticks

Traders use terms such as point, tick, and pip to describe price movements on financial markets. Analysts and traders use the three terms in the same way, but each is characterized by the degree to which it represents and its application in the market. There are two types of smallest price changes — points and ticks. Points represent the smallest price change on the left side of a decimal point, while ticks are smallest on the right side. In the forex market, a pip is a measure of the smallest change to the right of the decimal, and is similar to a tick.

In order to understand risk and reward and profit and loss, you have to know what each term means in different situations.

Points

Points on the stock market reflect changes in a stock’s price, or their index, in whole dollars. With respect to an individual stock, one point is always equivalent to one dollar. The drop from $53 to $48, as an example, would be expressed as a five-point drop (not as a five-dollar drop). What is the purpose of using points, you might ask?

Even though a point represents the same dollar amount across various stocks, its percentage change in value depends on the price of the stock under consideration. A three point decrease in the share price of a $30,ooo stock (3/30,000 x 100) represents less than 0.01 percent of the drop in share value. A three-point drop in the share price of a $10 stock, on the other hand, would result in a 30 percent fall in the stock price.

The correct term may vary according to market context. Markets and context determine which term is appropriate. Price movements in the futures market are discussed using terms like ticks and points. The forex market also uses pip values for this purpose.

In addition to the context discussed here, the terms could also appear in other contexts. A stock trader, for example, might refer to the movement of a stock in “points” when discussing how much money has been changed. “Three points up” means they bought the stock at $5 and it is now worth $8.

One point change in a stock index doesn’t necessarily indicate a one-dollar shift in the market. Thus, it is incorrect to assume that thirty stocks on the Dow Jones Industrial Average rose by a sum of one dollar each when it drops by one point. The index may have included some risers and some falling stocks, with varying degrees of change. In place of this, a Dow point represents a change of one dollar in the index’s weighted average price of its shares. Indexes commonly include a wide variety of high-priced stocks, so using points in place of dollars simplifies the communication of changes in stock price, emphasizing collective performance.

Ticks

Historically, ticks represent fractional price changes in stocks or securities that are less than one dollar or a cent. To establish a minimum increment by which a change in price can be measured in a particular market, a tick value, or tick size, is used. In fact, irrespective of the tick size available in a given market, below a certain threshold, incremental price movements below that are not able to be tracked. The price will not be affected by a change of $0.05 in a stock that has a tick size of $0.10. By contrast, the stock price would move up or down in increments of 0.10, from $40 to $40.10, $40.20, and so on.

A tick can also be used to indicate the direction in which the closing price has moved relative to previous trades in stocks trading. Upticks represent increased price movements and downticks are related to decreased trading prices. The SEC established an uptick rule in 2007 that required that all short sales (when a trader expects prices to decline and borrows an asset with the hope of selling and repurchasing it at a lower price) be done at a higher price than previous ticks.

Its original purpose was to stop short traders from collectively devaluing the stock price. A new alternative uptick rule took effect in 2010, which applies only to shares whose prices have plummeted by 10 percent in a single day. In order to combat downward market pressure, the alternative uptick rule grants trading preference to sellers taking long positions when this 10 percent loss threshold is reached.

Pips

The forex market (Forex) uses pip (percentage points) as a measure of fractional price changes in currency pairs. Almost all currency pairs are priced to the ten-thousandth decimal place (four digits following the decimal point). Pips are smaller than ticks, and represent the smallest increment between the price reduction or increase of a currency pair. A pip represents the relationship or “spread” between two currencies rather than a specific stock or security.

Profits and losses in currency trading are expressed in terms of pip movements relative to the positions that are entered. An investor, for example, may use euros to buy dollars, anticipating the dollar will rise in relative value to the euro. Assuming the trader bought dollars at €1.6740 per dollar and sold those dollars (thereby exiting the trade) at €1.6765, they made 25 pip profit.

Final words

Understand your market and trade relative to points, ticks, and pips before acting on a trade. Having this kind of knowledge, will make you more capable of figuring out how market movements impact financial outcomes, as well as weighing risks, rewards, profits, and losses with more accuracy.