What is a Point/Pip/Tick?

Q. What is a Point/Pip/Tick?


A: In spread betting you trade an amount 'per point' of movement of the share, commodity or index as the case might be. The Point, Pip or Tick are different measures denoting the unit movement required on the market you are speculating on to change the gain/loss on your bet by the full stake amount. It is important to note that a point does not always equal a penny - sometimes it is a cents, sometimes a point or even a fraction of a point such as when you bet on an index like the S&P (which for instance is dealt in tenths of a point)

You learn to drive by driving.
You learn to swim by swimming.
You learn to trade by trading.
Go to any professional trading firm, and their training program will broadly consist of 10% theory/trading setups/...etc and 90% live trading...
The time to sit down and analyse is when you are analysing your own trading results.
Use all other outlets (forums, books, etc.) as a means to bounce ideas, learn new things, etc. to compliment your actual trading.

A Pip is a decimal point. Pips are measured to four decimal places. For example, the price £1.01 which reads One Pound and 1 Penny, could be written to four decimal places as follows: £1.0100 = £1.01. Therefore, if you added 5 Pips to this price, the figure would read as follows: £1.0105. Therefore, if the market price was to increase from: £1.0101 (One Pound, One Penny and 1 pip) to £1.0115 (One Pound, One Penny and 8 pips). The market price would have increased by 14 Pips. So when a trader says they made 50 Pips today, then you know they mean that the market price goes from: £1.0100 to £1.0150. Once you master the concept of Pips, you are well on your way to understanding the basic measurements used in the currency spread betting.

For instance -:

For Next (NXT: LON) -> trade per point on Next is for each penny movement in Next's share price
For the FTSE or Dow -> a bet per point would be for each point movement in the FTSE or Wall Street contracts, this means that if you went long on the FTSE at 10 pt per point when it was trading at 4200 and the index moved up to 4250, then your gain would amount to 10 X 50 = £500

Tick usually denotes futures contracts with a base of 100 like Bunds or Short Sterling while pips are used in forex trades.

Q. What are pips and points?

A: It sounds like the crude tally used in a hop scotch match among children, but the terms “pips and points” are two that you will need to understand.

So what are they?

A pip or point is the rate in which the price of a financial instrument can move. The increment move up or down is known as a ‘tick’. These terms are often difficult to understand, so I will explain these terms using an example -

Say you are trading currency FX GBP/AUD , which is being quoted 1.6915. If the price moved up 1 point it would be quoted as 1.7015. If the price moved up by 1 pip it would be quoted as 1.6916. As you can see 1 point is equal to 100 pips, and the pip is the same as a one basis point which is 1/100 of a one percent.

When a trader places a bet they are usually are trading for a 1 point or 1 pip move, and it’s important to understand the difference, the reason being, is that a 1 point move in a currency pair equals to 100 pips , so if you think you have placed an order for £1 per point which turns out to actually be £1 per pip, then you would be over invested by 100 times! And if the currency is trading in volatile markets, you could potentially be at a loss very quickly.

Most trading platforms will make it easy for the investor to determine if the price is quoted in points or pips. They will usually state this on the trading ticket or display the price differently by 'bolding' or increasing the the size of the last digits in the price.

Q. Does a fraction of a pence count as a point move in SB or does only a full 1p move only count?

A: Just the penny movement for shares. Each point is equivalent to a 1 penny movement in the share price (or 1 US cent for US shares, 1 Euro cent for European shares, and so on). So if you opened a long spread bet on Vodafone stock at 140p betting £10 per point and Vodafone subsequently rose to 149p, this would be equivalent to a 9 points movement translating into a £90 gain [9 points x £10]

. For indices, each point is equivalent to a 1 point movement in the quoted price or the index.

You will often hear experienced spread betters referring to a spreadbet at 'so much a tick', or point. A tick is quite simply the smallest possible movement either way in the price of a share, commodity..etc. An upward movement is an uptick and a downward movement a downtick.

Q. What difference does the buy/sell price make if you're betting say £1 for unit? What are the odds?

For example, let's assume I buy 100 units at £1 each for the share price to go up over the course of the day, therefore this would cost me £100 to place the bet? How do you gain money from that? What are the odds?

A: Ok, so -:

There are no odds.
There are no units.

So you bet an amount per point. The minimum is 1 pound and there is really no maximum. Each 'market' requires an amount of margin or money to cover the bet.

If you are buying 100 actual shares then this is the equivalent to betting 100p per point which is 1 pound. So betting 100 pounds per point is the equivalent of buying 10,000 shares (1 pound per point = 100 shares, betting 100 pounds per point = ?). Assuming the share price of a company is £3.50, acquiring 10,000 shares would normally cost you 35,000 pounds if you were to buy traditional shares. But you can achieve the same profit less the spread with much less money because you could open the position with IG Index having only 1,750 pounds (assuming your provider requires a 5% initial margin on the 35,000 pounds).

The spread amounts to the difference between the buy and sell price. Because with spread betting you can place down bets or short the market. So looking at IG Index, they are currently quoting a spread of about 1 point on BP for a daily bet. On the Mar 2011 contract its 5 points. So if you are betting 100 pound per point then the cost to you is 100 pounds for the daily bet or 500 pounds for the Mar 2011 bet. The Daily bet will be closed at 4:30 or you can pay to roll it over to the next day. There is a cost to this referred to as financing (in practice a small fee for holding the position overnight).

You gain or lose money as the price changes. You can buy or sell at any time while the market is open unless you start trying to place massive bets. Bear in mind that spread betting is stupid if you have a very long term view on shares like a couple of years (you'll get absolutely raped on the carry), just bear that in mind. It is really geared towards specific applications like day trading and swing trading.

 ...Continues here - Initial and Variation Margins

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