What is a lot in securities trading?
In the financial markets, a lot represents the standardized number of units of a financial instrument as defined by an exchange or similar regulatory body. The number of units is determined by the size of the lot. On the stock market, most stocks are traded in lots of 100 stocks, although some higher priced stocks can trade in lots of 10 stocks. Each market has its own lot size.
Understanding the lot in securities trading
When investors and traders buy and sell financial instruments on the capital markets, they do so in batches. A lot is a fixed quantity of units and depends on the financial security traded.
For stocks, the typical lot size is 100 stocks. This is known as a round batch. A round lot can also refer to a number of shares which can also be divided by 100, such as 300, 1,200 and 15,500 shares.
Customers can always place orders in irregular batches, which corresponds to an order of less than 100 shares. An order of 35 shares is an odd lot, while an order of 535 shares has five round lots and an odd lot of 35 shares.
Similar to stocks, the round lot for exchange-traded securities, such as an exchange-traded fund (ETF), is 100 shares.
Key points to remember
- Much is the standardized number of units in which a financial instrument is traded.
- Shares are traded in 100 share units, called round lots, but can also be traded in odd lots.
- Bonds can be sold in lots of $ 10,000 or more, although the face value can be as low as $ 1,000 that individual investors can buy.
- A trader can buy or sell as many futures contracts as he wants, although the underlying amount the contract controls is set according to the size of the contract.
- One option represents 100 shares of the underlying stock.
- Forex is traded in micro, mini and standard lots.
The bond market is dominated by institutional investors who buy debts from bond issuers in large quantities. The standard commercial unit or lot for a US government bond is $ 1 million. The municipal bond market has a smaller lot per transaction at $ 100,000. The other bonds can be traded in increments of $ 10,000.
This does not mean that a trader or investor should buy bonds in this quantity. Bonds generally have a face value of $ 1,000 to $ 10,000 (some are even lower). An investor can buy as many bonds as he wants, but it can still be a strange lot.
In terms of options, a lot represents the number of contracts contained in a derivative security. A stock option contract represents 100 shares underlying the shares of a company. In other words, the lot for an option contract is 100 shares.
For example, an option trader bought a Bank of America (BAC) call option last month. The option has an exercise price of $ 24.50 and expires this month. If the option holder exercises his call option today while the underlying share, BAC, is trading at $ 26.15, he can buy 100 shares of BAC at the exercise price of 24.50 $. An option contract gives him the right to buy the lot of 100 shares at the agreed exercise price.
With such standardization, investors always know exactly how many units they buy with each contract and can easily assess the unit price they pay. Without such standardization, valuation and trading options would be unnecessarily burdensome and time consuming.
The smallest options trade a trader can do is for a single contract, which represents 100 stocks. Therefore, it is not possible to trade options for less than 100 shares, unless the underlying security is traded in a smaller lot (extremely rare).
As far as the futures market is concerned, lots are called contract sizes. The underlying asset of a futures contract can be a stock, a bond, interest rates, a commodity, an index, a currency, etc. Consequently, the size of the contract varies depending on the type of contract negotiated. For example, a futures contract for corn, soybeans, wheat or oats has a lot size of 5,000 bushels. The lot unit for a Canadian dollar futures contract is 100,000 CAD, a British pounds contract is 62,500 GBP, a Japanese yen contract is JPY 12,500.00, and a euro futures contract is of 125,000 EUR.
Unlike stocks, bonds and ETFs in which irregular lots can be purchased, the standard contract sizes for options and futures are fixed and non-negotiable. However, derivatives traders buying and selling futures contracts can customize the size of the contract or lot of these contracts, because futures contracts are non-standardized contracts created by the parties involved.
Standardized lots are set by the stock market and allow greater liquidity on the financial markets. The increase in liquidity is accompanied by reduced spreads, creating an efficient process for all the participants concerned.
When trading currencies, there are micro, mini and standard lots. A micro-lot represents 1000 of the base currency, a mini-lot 10 000 and a standard lot 100 000. Although it is possible to exchange currencies in a bank or exchange office for amounts less than 1,000, when trading via a forex broker, the smallest transaction size is generally 1,000, unless otherwise noted.
Examples of lots in trade
In the options and futures markets, lot trading is not as much of a concern because you can trade as many contracts as you want. 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 at least 1,000 of the base currency, in increments of 1,000. For example, they could trade 1,451,000. That is 14 standard lots, five mini lots and a micro lot.
In a stock exchange transaction, a person can trade odd lots of less than 100 shares, but odd lot orders of less than 100 shares will not be shown on the offer or demand, unless the odd lots total more than a round batch.
Suppose a stock has an offer of $ 50.10 and an offer of $ 50.35. This is the offer and the offer because there are at least 100 stocks being purchased and offered at these levels. If a trader were to place an order for 50 shares at $ 50.20, the offer would always remain at $ 50.10 and the order for 50 shares at $ 50.20 would not be visible at Level II for most traders. The reason is that the order is not for a round lot. Round lots change the price, unlike odd lots.
Suppose that another trader also decides to place an order of 70 shares at $ 50.20. There are now more than 100 shares offered at $ 50.20, so the offer will increase to $ 50.20.