Odd Lot

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 refers to a stock order involving the selling and purchasing of fewer than 100 shares, such as 19.

Thus it refers to a size that is less than the normal lot size of the asset. The commission of trading for such stocks is more than the usual amount. Large organizations tend to buy back such lots by paying a premium to shareholders due to the small size.

• 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.

To understand the definition and theory of odd lot trading, 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.

The following example will help you understand the concept better.

Let us assume that there is a college student named Mark whose father gives him a monthly expense. For the first three weeks, Mark’s motorbike fuel tank will have enough fuel to last for the initial three weeks. After that mark will run out of cash. So when that happens, how will he take care of the transportation expense for the rest of the 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 Mark took a job.

Odd lot theory is nothing but how Mark took care of the petrol expenses from 21st to 30th every month during the college days. The standard unit of buying petrol was $1 for a litre, but Mark 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 stock if the investor buys small quantities. Thus, this example makes the understanding of the concept clearer.

Let us look at some of the advantages of this kind of investment.

• 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 lot stock. 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 transactions.
• 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.”

Some disadvantages highlighted below should be noted before going for odd lot trades.

• Odd lot theory often faces difficulties in the stock market because of the complicated value. It becomes difficult to calculate it.
• The commissions charged on them are also high. Thus, if a trader wants to sell, it is difficult to find a suitable buyer who will go for odd lot transactions and be ready to pay a higher commission.
• Consequently, it becomes hard to find readily available sellers as most exchanges do not allow their trading. . Thus, due to lack of proper trading platform it also becomes difficult to buyers sell them.
• 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.

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 the investor's portfolio.

Suppose there is 100 shares of a stock, with each share priced at $1. If it goes up to $2, the investor can easily calculate your profit as $100. But if they have 93 shares of the same stock, they have to do a more elaborate calculation when the share price rises.

Amongst transactions of 100, 200, or 500 shares, finding buyers for 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.

Thus, these are some of the differences between both of them.

This has been a guide to an odd lot and its definition. Here we discuss how odd lots work, causes, examples, and how they differ from the broad lot. You can find more articles from the following –

• Clearing House
• Day Trader
• Stock Halt