Points, ticks, and pips are ways of describing a change in asset prices. The use of these terms depends upon the market being discussed and the amount of the price change in question. Let's look at what these individual terms mean and when to use them.
- Points represent the smallest whole-number price increment change that can occur in futures trading.
- Ticks are smaller fractions of a point in futures price changes. Each tick is worth a certain fractional value, such as 0.10 or 0.25 points.
- Pips represent changes in the fourth decimal place in most forex currency pairs.
- Each of these measurements has a dollar value that's based on the exchange on which it is traded.
Points typically refer to futures trading. One point is the smallest price increment change that can occur on the left side of the decimal point. For example, S&P 500 E-Mini (ES) futures might experience a price change from 1314.00 to 1315.00, which is a price change of one point. If Crude Oil (CL) moves from 68.00 to 69.00, that is one point. Each point of movement has a dollar value attached to it, but the exact value varies by exchange. For example, each point of movement in crude oil on the Chicago Mercantile Exchange (CME) is equivalent to $1,000.
A point consists of ticks, which are the price movements that occur on the right side of the decimal when looking at the price of a futures contract. A tick is the smallest possible price change measured by markets. Markets have different tick sizes, and each tick's value varies by the futures contract. Gold futures (GC) have a tick size of 0.10. The S&P 500 E-Mini has a tick size of 0.25, and crude oil has a tick size of 0.01.
The size of the tick determines how many ticks it takes to increase the point. Since each tick in the S&P 500 E-mini is worth 0.25, there are four ticks to a point. In gold futures, where the tick size is 0.10, there are 10 ticks to a point.
Since ticks are fractions of a point, their dollar value (or "tick value") depends on the futures contract being traded. For crude oil on the CME, where each point is worth $1,000, the tick value is $10. For the S&P 500 E-mini, the tick value is $12.50, which makes each point worth $50. To find the tick value for other futures, find the contract on the CME Group website, click on the appropriate contract, and then click on the Contract Specs tab.
A pip refers to a currency pair price movement. A pip of movement occurs each time the fourth decimal place of the price moves by one. It applies to all currency pairs, except those that contain the Japanese yen (JPY). For example, if the EUR/USD forex pair moves from 1.1608 to 1.1609, that is one pip of movement.
For forex pairs that contain the JPY, one pip of movement occurs at the second decimal place. If the USD/JPY moves from 109.16 to 109.15, that is one pip of movement.
Forex brokers now offer fractional pip pricing, which means that a fifth decimal place is often quoted. If the price of the EUR/USD moves from 1.08085 to 1.08095, that is one pip of movement. If the price moves from 1.08085 to 1.08090, then it only moved half a pip. There are 10 fractional pips to a whole pip.
How much money a pip of movement is worth, called "pip value," depends on the forex pair being traded. For pairs where the USD is listed second, like the GBP/USD, the value of each pip is fixed at $10 per $100,000 traded. For pairs where the USD is not listed second, or if the trader is not using a USD account, the pip value fluctuates.
The Correct Term Varies by Market and Context
Points and ticks are used in the futures market when discussing price movements. Pips are used in the forex market for the same purpose.
You may also hear the terms in contexts that have nothing to do with what's discussed in this article. Stock traders, for instance, may use the term "points" when talking about how many dollars a stock has moved. If they bought at $5, and the stock is now at $8, they may say they are "up three points."
The term "tick" is also used in reference to tick charts, which track transactions, so in that context, a tick represents a transaction, not a monetary value. When someone refers to a tick chart, they are talking about a chart type that logs each transaction and plots it on a price-and-time graph.
Frequently Asked Questions (FAQs)
What does it mean when they say "the Dow dropped 1,000 points"?
When analysts talk about the Dow Jones Industrial Average moving by a certain amount of points, they're essentially using the term the same way futures traders use it. The only difference is that "the Dow" refers to an index rather than a futures contract. If the Dow Jones Industrial Average were 36,000, a 1,000-point decline would be a roughly 3% slump.
What is a "basis point" in stocks?
A "basis point" refers to the percentage of the movement rather than the dollar amount. There are 100 basis points in each percentage point. In other words, each basis point equals a 0.01% movement. If a stock started at $1,000, then a single basis point movement would equal $0.10.