Trading Lots

Lot

What it is:

A lot is a securities trade for a “standard” number of trading units. In stock trading, a lot is 100 shares (also called a “round lot”). However, inactive stocks generally trade in 10-share lots.

How it works (Example):

Lots are the standard trading amount, and thus they usually incur the most favorable commission costs. For example, if you wanted to buy six lots of Company XYZ stock, you would be buying 600 shares.

Investors, especially individuals, frequently cannot or do not want to bear the expense of trading shares in round lots, however, which is why most brokers also accept “odd-lot” trades (though they may charge a higher commission for doing so). However, the advent of electronic and online trading platforms has reduced, and in some cases eliminated, these odd-lot premiums.

Why it Matters:

Lot  investors tend to be larger investors. The ratio of odd-lot buying to odd-lot selling, on the other hand, is often used to evaluate small-investor sentiment.

Source: http://www.investinganswers.com/financial-dictionary/stock-market/lot-5075

What is a ‘Standard Lot’

A standard lot is the equivalent to 100,000 units of the base currency in a forex trade. A standard lot is similar to trade size. It is one of the three commonly known lot sizes; the other two are mini-lot and micro-lot.

Breaking down ‘Standard Lot’

A standard lot represents 100,000 units of any currency, whereas a mini-lot represents 10,000 and a micro-lot represents 1,000 units of any currency. A one-pip movement for a standard lot corresponds with a $10 change. For example, if you buy $100,000 against the Japanese yen at a rate of  ¥110.00 and the exchange rate moves to ¥110.50, which is a 50 pip movement, you have made $500. Conversely, if the exchange rate falls 50 pips to ¥109.50  your net profit and loss is minus $500.

With the advent of online brokers and increased competition it is possible for retail investors to make trades in amounts that aren’t a standard lot, mini-lot, or micro-lot.

In the interbank market where banks trades with each other on platforms such as Reuters and EBS, the standard trading size, or standard lot, is 1 million units in the base currency.

Source: https://www.investopedia.com/terms/s/standard-lot.asp

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.

Breaking down ‘Odd Lot’

Odd lots may inadvertently arise in an investor’s portfolio through reverse splits or dividend reinvestment plans. For example, a one-for-eight reverse split of a security, of which the investor holds 200 shares, will result in a post-split amount of 25 shares. While trading commissions for odd lots may still be higher than for standard lots on a percentage basis, the popularity of online trading platforms and the consequent plunge in brokerage commissions means that it is no longer as difficult or expensive for investors to dispose of odd lots as it used to be in the past.

Odd Lots, Round Lots and Mixed Lots

While odd lots can include any number of shares between one and 100, a round lot is any lot of shares that can be evenly divided by 100. For example, 75 shares would be an odd lot since it is below 100 shares, while 300 shares would be a round lot since it can be evenly divided by 100.

Even Lot

A normal unit of trading for securities or bonds. An even lot purchase of stock is 100 shares, while an even lot purchase for bonds is five shares. A stock transaction that involves less than 100 shares is considered an odd lot and may incur higher trading fees on a fee-per-share basis.

Breaking down ‘Even Lot’

Investors may realize cost savings the more shares that they purchase. Institutional investors, for example, trade in much larger lots and can spread costs over more shares. Trading in large even lots results in enhanced market liquidity and minimizes the impact of trading spreads.

Also referred to as round lots or full lots.

What Is a Lot (Securities Trading)?

A lot in the financial markets is the number of units of a financial instrument bought on an exchange. The number of units is determined by the lot size. For example, in the stock market, a round lot is 100 shares. However, investors do not have to buy round lots, where a lot can be any number of shares.

How a Lot (Securities Trading) Works

When investors and traders purchase and sell financial instruments in the capital markets, they do so with lots. A lot is a fixed quantity of units and depends on the financial security traded.

For stocks, the typical lot size was round lots of 100 shares for many years, until the advent of online trading. A round lot can also refer to a number of shares that can evenly be divided by 100, such as 300, 1,200, and 15,500 shares.1

However, now odd lots, which is an order for less than 100 shares, and mixed lots—a number of shares above 100 but not divisible by 100—are more common. Similar to stocks, the round lot for exchange-traded securities, such as an exchange-traded fund (ETF), is 100 shares.

Types of Lots (Securities Trading)

Bonds

The bond market is dominated by institutional investors who buy debt from bond issuers in large sums. A round lot for U.S. government and corporate bonds in some circles is considered $1 million. However, it can also be $100,000, such as the case with municipal bonds.2

That doesn’t mean a trader or investor needs to buy bonds in that quantity. Bonds typically have a face value of $1,000 to $10,000 (some are even lower). An investor can buy as many bonds as they like, yet it still may be an odd lot.

Options

In terms of options, a lot represents the number of contracts contained in one derivative security. One equity option contract represents 100 underlying shares of a company’s stock. In other words, the lot for one options contract is 100 shares.

For example, an options trader purchased one Bank of America (BAC) call option last month. The option has a strike price of $24.50 and expires this month. If the options-holder exercises their call option today when the underlying stock, BAC, is trading at $26.15, they can purchase 100 shares of BAC at the strike price of $24.50. One option contract gives them the right to purchase the lot of 100 shares at the agreed strike price.

With such standardization, investors always know exactly how many units they are buying with each contract and can easily assess what price per unit they are paying. Without such standardization, valuing and trading options would be needlessly cumbersome and time-consuming.

Typically, the smallest options trade an investor can make is for one contract, and that represents 100 shares. However, it is possible to trade options for a smaller amount with mini-stock options which have an underlying share amount of 10.3

Futures

When it comes to the futures market, lots are known as contract sizes. The underlying asset of one futures contract could be an equity, a bond, interest rates, commodity, index, currency, etc. Therefore, the contract size varies depending on the type of contract that is traded.

For example, one futures contract for corn, soybeans, wheat, or oats has a lot size of 5,000 bushels of the commodity.4 The lot unit for one Canadian dollar futures contract is 100,000 CAD, one British pound contract is 62,500 GBP, one Japanese yen contract is 12,500,000 JPY, and one euro futures contract is 125,000 EUR.5

Unlike stocks, bonds, and ETFs in which odd lots can be purchased, the standard contract sizes for options and futures are fixed and non-negotiable. However, derivatives traders purchasing and selling forward contracts can customize the contract or lot size of these contracts, since forwards are non-standardized contracts that are created by the parties involved.

Standardized lots are set by the exchange and allow for greater liquidity in the financial markets. With increased liquidity comes reduced spreads, creating an efficient process for all participants involved.

Forex Lots

When trading currencies, there are micro, mini, and standard lots. A micro lot is 1,000 of the base currency, a mini lot is 10,000, and a standard lot is 100,000. While it is possible to exchange currencies at a bank or currency exchange in amounts less than 1,000, when trading through a foreign exchange broker typically the smallest trade size is 1,000 unless expressed stated otherwise.6

Lot Examples

In the options and futures markets, trading in lots isn’t as much of a concern since you can trade any number of contracts desired. Each stock option will represent 100 shares, and each futures contract controls the contract size of the underlying asset.

In forex, a person can trade a minimum of 1,000 of the base currency, in any increment of 1,000. For example, they could trade 1,451,000. That is 14 standard lots, five mini lots, and one micro lot. In a stock trade, a person can trade in odd lots of less than 100 shares.

Summary

• A lot is the number of units of a financial instrument that is traded on an exchange.
• For stocks, a round lot is 100 share units, but they can also be traded in any number of shares.
• A bond lot can vary, where sometimes they are $100,000 or $1 million, but face values may be as low as $1,000 that individual investors can purchase.
• A trader can buy or sell as many futures as they like, although the underlying amount that a contract controls is fixed based on the contract size.
• One option represents 100 shares of the underlying stock, while forex is traded in micro, mini, and standard lots.

Source: https://www.investopedia.com/terms/l/lot.asp loaded 28.03.2021