Odd Lot Definition
An odd lot refers to a stock order involving the sale or purchase of lesser than 100 shares, such as 19 shares. For ease of exchange, stock exchanges trade stocks in a standardized unit such as 100 or 1000 shares. However, many small investors cannot afford to invest in huge chunks, leading them to spend on an odd lot of expensive stocks.
- 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, 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.
How Does Odd Lot Trading Work?
In order to understand the definition and theory of odd lot, let us first take a 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. 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 trading of shares. 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 have shares in multiples of 100, such as 400, 1000, etc. Stock exchanges, investors and brokers typically prefer to trade in round lots and dissuade trading in odd lots. Any lot of shares less than 100, such as 19, is an odd lot 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. because of the complicated value. Consequently, it becomes hard to find readily available sellers for their trade as most exchanges do not allow their trading. The commissions charged on them are also high.
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. to repurchase odd lots or make them a more divisible number such as 20 from 19. This is because keeping track of these shares is expensive for companies. It also slows down the exchange process, especially in 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. . 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 stock splitStock SplitStock split, also known as share split, is the process by which companies divide their existing outstanding shares into multiple shares, such as 3 shares for every 1 owned, 2 shares for every 1 held, and so on. The company's market capitalization remains unchanged during a stock split because, while the number of shares grows, the price per share decreases correspondingly., it splits a single share into many units. It can leave a shareholder with an odd lot. The same could happen with reverse stock splitReverse Stock SplitReverse stock split refers to the process of boosting a company’s stock price by reducing the number of its outstanding shares. It is attained by combining some of the existing shares in the market and simultaneously raising their value in the same ratio. that involves the consolidation of a certain number of shares into one.
- This 2019 WSJ report explores the reason behind 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 was trading 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.
- Most new investors do not have such an amount of money, but they can buy three shares for $2010. Buying three shares is an example of odd lot trading. The report specifies that the rise in smaller lots was due to expensive stocks—for instance, Amazon with its share price beyond $1000.
- 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 create 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 used to give me monthly expenses. For the first three weeks, my motorbike’s fuel tank will have enough fuel. 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 litre at that time. Borrowing from here and there often helped to 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 litre, but I bought it in smaller numbers like 30 cents, 45 cents.
The same thing applies in the stock market. The standard value of trading is usually 100, but if you buy small quantities, anything between 1- 99 is known as odd lot trading.
Odd Lot vs Board Lot
A board lot is the standardized unit of trading shares at a stock exchange. For example, earlier, different stock exchanges in Japan traded in eight lots. 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 a lot of 100, 500, or 1000.
One of the significant differences between the two is that in a board lot, it is easier to calculate the amount of investment, losses and profits. 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. When the share price rises, you’d have to do a more elaborate calculation.
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. Amongst transactions of 100, 200 or 500 shares, finding buyers for your 32 or 57 shares will not be an easy task.
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.
This has been a guide to what is an odd lot and its definition. Here we discuss how odd lots work, causes, examples and how it differs from the broad lot. You can find more articles from the following –