Pips vs. Points vs. Ticks: An Overview
Point, tick, and pip are terms used by traders to describe price changes in the financial markets. While traders and analysts use all three terms in a similar manner, each is unique in the degree of change it signifies and how it is used in the markets. A point represents the smallest possible price change on the left side of a decimal point, while a tick represents the smallest possible price change on the right side of a decimal point. A pip, short for "point in percentage," is similar to a tick in that it also represents the smallest change to the right of the decimal, but it is a crucial measurement tool in the forex market.
A point is the largest price change of the three measurements and only refers to changes on the left side of the decimal, while the other two include fractional changes on the right.
The point is the most generically used term among traders to describe price changes in their chosen markets.
An investor with shares in Company ABC stock might describe a price increase from $125 to $130 as a five-point movement rather than a $5 movement.
Some indexes restate prices in a manner that allows investors to track price changes in points. For example, the investment grade index, or IG Index, tracks price movements to the fourth decimal. However, when quoting prices, it shifts the decimal four places to the left so movements can be stated in points. Therefore, a price of 1.23456 is stated as 12,345.6.
A tick denotes a market's smallest possible price movement to the right of the decimal. Going back to the IG Index example, if this index elected not to shift the decimal place to use points, its price movements would be tracked in increments of 0.0001. A price change, then, from 1.2345 to 1.2346 would represent one tick. Ticks do not have to be measured in factors of 10. For example, a market might measure price movements in minimum increments of 0.25. For that market, a price change from 450.00 to 451.00 is four ticks or one point.
Prior to April 2001, the smallest tick size was 1/16th of a dollar, which meant that a stock could only move in increments of $0.0625. While the introduction of decimalization has benefited investors through much narrower bid-ask spreads and better price discovery, it has also made market-making a less profitable (and riskier) activity.
A pip is actually an acronym for "percentage in point." A pip is the smallest price move that an exchange rate can make based on market convention. Most currency pairs are priced to four decimal places and the smallest change is the last (fourth) decimal point. A pip is the equivalent of 1/100 of 1 percent or one basis point. For example, the smallest move the USD/CAD currency pair can make is $0.0001 or one basis point.
- Point, tick, and pip are terms used to describe price changes in the financial markets.
- While traders and analysts use all three terms in a similar manner, each is unique in the degree of change it signifies and how it is used in the markets.
- Some indexes restate prices in a manner that allows investors to track price changes in points.