In the stock trading world, a lot refers to the standardized number of units of a stock or security being traded. An odd lot is when a trader buys or sells shares in increments less than a hundred.
Often, the actual value of a stock or security means that buying or selling just a single unit is not viable. That’s why traders and investors alike use a lot: a set amount of a given stock that you trade in each transaction.
The value of a lot is set by a stock exchange, or a market regulator like the U.S. Securities and Exchange Commission and is usually the minimum number of units of a particular stock that you can trade. This regulation means that traders always know how much of a stock they are trading when they open a position.
Today, we are going to explain what an odd lot is, how traders use odd lots and why the popularity of this trading activity has grown in recent years.
What Is an Odd Lot?
An odd lot is an order amount for a security that is less than the normal unit of trading for that particular asset. Odd lots are considered to be anything less than the standard 100 shares for stocks. Trading commissions for odd lots are generally higher on a percentage basis than those for standard lots since most brokerage firms have a fixed minimum commission level for undertaking such transactions.
How Does Odd Lot Trading Work?
To understand the definition and theory of odd lot, let us first look at the requirements of a lot. Stock exchanges trade securities in a standardized unit, referred to as a lot. Trading in simpler lots, such as multiples of 10, 100, or 1000, makes calculation easier when exchanging securities between parties. As such, stock exchanges have a board lot or a standard unit of shares trading. A single lot for many exchanges contains a stock’s 100 shares.
The board lot is also understood as a round lot. A round lot usually has shares in multiples of 100, such as 400, 1000, etc. Stock exchanges, investors, and brokers typically trade in round lots and dissuade trading in odd lots. Any lot of shares less than 100, such as 19, is odd as you cannot divide it easily. Trading in any amount between 1 to 99 is called odd lot trading.
Odd lot trading often faces difficulties in the stock market because of the complicated value. The commissions charged on them are also high. Consequently, it becomes hard to find readily available sellers as most exchanges do not allow their trading.
Companies often offer premium rates to their shareholders to repurchase odd lots or make them a more divisible number, such as 20 from 19. It is because keeping track of these shares is expensive for companies. It also slows down the exchange process, especially in options trading. They put traders and companies at risk of losing an opportunity if potential buyers only wish to trade in round lots.
Causes of Popularity
- When a company undertakes a stock split, it splits a single share into many units. The same could happen with a reverse stock split that involves consolidating a certain number of shares into one. It can leave a shareholder with an odd lot.
- This 2019 WSJ report explores the reason why almost half of the trading in the U.S. stock market involved odd lots. If they were such a hassle, why are they becoming popular? Let us explain with an example. Suppose a reputed coal company traded at a share price of $670 a month ago. One hundred shares of the company would have been around $67000. Now that’s a massive sum of money.
- The report specifies that the rise in smaller lots was due to expensive stocks—for instance, Amazon with its share price beyond $1000. Most new investors do not have much money, but they can buy three shares for $2010. Buying three shares is an example of odd-lot trading.
- Also, another pivotal catalyst to this situation is technology. Before, it was a long process, but today you can download a trusted app on your smartphone, open an account, and start trading due to the technology era.
- Moreover, many people do not want to buy a single stock in the market. It is common to diversify by purchasing small amounts of different stocks and creating a healthy portfolio. Just as Warren Buffet says – “Do not put all eggs in one basket.”
The following example will help you understand the concept better.
When I was in college, my father gave me monthly expenses. My motorbike’s fuel tank will have enough fuel for the first three weeks. After that, I would run out of cash. So, how did I take care of transportation expenses for the remaining month?
The exact price of petrol was $1 a liter at that time. Borrowing from here and there often helped collect around 40-50 cents. On some days, it was only 25 cents. Things got better when I took a job.
Odd lot trading is nothing but how I took care of my petrol expenses from 21st to 30th every month in my college days. The standard unit of buying petrol was $1 for a liter, but I bought it in smaller numbers like 30 cents, 45 cents.
The same thing applies in the stock market. The traditional trading value is usually 100, but anything between 1- 99 is known as odd lot trading if you buy small quantities.
Odd Lot vs Board Lot
A board lot is the standardized unit of trading shares at a stock exchange. For example, different stock exchanges in Japan traded in eight lots earlier. As of 2018, Japanese stock exchanges have adopted the standardized unit of 100 shares for trading domestic stocks. As discussed above, a board lot contains a round lot. A round lot usually contains multiples of 100 or 1000. Hence, a round lot will trade shares in 100, 500, or 1000.
One of the significant differences between the two is that it is easier to calculate the amount of investment, losses, and profits in a board lot. It also looks good on your portfolio.
Suppose you have 100 shares of a stock, with each share priced at $1. If it goes up to $2, you can easily calculate your profit as $100. But if you have 93 shares of the same stock. You’d have to do a more elaborate calculation when the share price rises.
Amongst transactions of 100, 200, or 500 shares, finding buyers for your 32 or 57 shares will not be an easy task. Besides, it is easier to get in and out from trades with board lots as they are the accepted trading unit at exchanges. As such, it is easier to find their buyers.
Board lots are encouraged to diminish the practice of odd-lot trading. Both the lots have their pros and cons, which is why you must choose which is the best trading style for you. Managing a round lot can be difficult for some investors. In such cases, try to bring the lot closer to an easily divisible number, such as 30 or 90.