What is a Tick?
A tick is a minimum change in the price of a security. Also known as a downtick, a minus tick occurs when a security sells at a price less than the preceding sale. A minus tick is the opposite of an uptick.
Although the term is usually used in reference to stocks, it can also apply to bonds, commodities and other traded securities.
How Does a Tick Work?
For example, if there is a trade for XYZ Co. at $15 per share, and the next trade is at $12 per share, the first tick would be at $15 and the second tick would be at $12. (In this example, the XYZ shares are said to be 'on a minus tick.')
Before 2001, stocks traded in increments of 1/16th of $1 (about $0.0625). That means that a security had to change by at least that amount. (This is no longer the case.)
Why Does a Tick Matter?
Ticks are important because they indicate the price trend of a stock. They also trigger restrictions on short sales. In the United States, when a stock is on a minus tick, traders are generally prohibited from shorting the stock. This rule (called the short sale rule or the tick test) exists to prevent traders from jumping on the bandwagon to destabilize a stock's price (note that exchange-traded funds can be shorted on a minus tick, however).