Odd Lot Definition Theory Causes How Does It Work

Odd Lot Definition

Key Takeaways

An odd lot is any trading executed below the standard set value of assets or stocks, typically 100. It is preferred to trade in the lot of 100 due to the ease of calculations while executing orders.Odd lot trading often faces difficulties in the stock market because of the complicated value. Consequently, it becomes hard to execute the move in and out of trades. There are also slippage issues.It is popular among new investors and people who cannot afford to invest in 100 shares at once. People who are not ready to stake everything in one stock also prefer trading in small numbers.

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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 exchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more 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 marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more 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 shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more 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 inOptions Trading refers to a scenario when the trader can buy or sell the stocks within a specific period & at a specific rate. You can trade options through Brokers, Self-Investments, or with the help of Standardized Platforms. read more options tradingOptions TradingOptions Trading refers to a scenario when the trader can buy or sell the stocks within a specific period & at a specific rate. You can trade options through Brokers, Self-Investments, or with the help of Standardized Platforms. read more. They put traders and companies at risk of losing an opportunity if potential buyers only wish to trade in round lots.

Causes of Popularity

Examples

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.