A lot is the standard number of units in a trading security. In the financial markets, a lot represents the standardized quantity of a financial instrument as set out by an exchange or similar regulatory body.
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, a lot is the number of shares that is purchased or sold in one transaction. The standard minimum stock order that can be placed through an exchange without incurring higher commission fees is In the stock market a lot of shares is known as a round lot. A round lot can also refer to a number of shares that can evenly be divided by e.
Trading with odd lots , that is less than shares or a number of shares not divisible by , commanded higher commission costs in the past. However, the emergence of electronic and online trading platforms has reduced or eliminated the premium paid for trading in odd lots. In this case, his order will be broken into two separate orders comprising of one round lot and one 70 odd lot.
His order will be filled in two sections as well so when he checks his order status on his trading dashboard, he will see shares filled at a certain price and another section that has 70 shares filled at a certain price. The prices at which each lot is filled may be the same or different, depending on the liquidity for the stock. Similar to stocks, the board lot for exchange-traded securities, such as an exchange-traded fund ETF , is shares.
The bond market is dominated by institutional investors who buy debt from bond issuers in large sums. Any bond purchase of less than the standard lot is referred to as an odd lot. In terms of options , a lot represents the number of contracts contained in one derivative security. In other words, the lot for one options contract is shares. One option contract gives him the right to purchase the lot of 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. 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 lots vary 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, bushels of the commodity.
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 shaped by the parties involved.
Standardized lots are set by an exchange and allows for greater liquidity in the financial markets. With increased liquidity comes reduced spreads in the market, creating an efficient process for all participants involved. For example, it is easier for a broker to match a seller with shares of a stock to a buyer who wants to purchase a round lot, than it is to find a seller for a buyer who wants to purchase 53 shares.
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