A round lot represents a standard trading order of securities, consisting of 100 or any multiple of 100 units. These units could be in the form of stocks, bonds, or other financial instruments.
Key Points to Remember
- Standard Trading Units: A round lot is the minimal standard trading size for an asset.
- Stocks: Typically, a round lot comprises 100 shares or multiples of 100 shares.
- Bonds: In bonds, a round lot amounts to $100,000 or multiples thereof.
- Shrinking Barriers: Technological advancements make trading odd lots and smaller lots more accessible.
How Round Lots Work
A trading lot represents a fixed number of units of a financial asset traded on an exchange. These lots might be of any financial instrument such as stocks, ETFs, bonds, options, futures, and foreign exchange.
Investment managers and institutions generally purchase stocks in large quantities. Round lots are cost-effective, often offering reduced trading costs through discounted rates. By trading in round lots, the process becomes simplified, ensuring enhanced market efficiency.
Historically, the smallest order possible for stocks on exchanges was 100 shares. However, technological innovations have enabled the trading of odd lots and fractional shares, permitting trades as small as one share.
Types of Round Lots
- Stocks: A standard round lot for stocks usually consists of 100 shares. ETFs fall under this category as they trade like stocks.
- Bonds: In bonds, a round lot corresponds to $100,000 worth of bonds or a multiple thereof. Smaller amounts incur higher trading costs, though innovations are facilitating smaller bond trades.
- Options: In the options market, a round lot entails 100 contracts in listed calls and puts. Smaller numbers of options contracts signify an odd lot.
- Futures: Futures contracts depend on the underlying asset. For instance, a futures contract for wheat has a lot size of 5,000 bushels.
- Foreign Exchange: Lot sizes vary, with the standard lot in forex comprising 100,000 units of the base currency. Micro and mini lots include 1,000 and 10,000 units respectively.
Trading in round lots generally performs quicker and more efficiently, though odd lots are gaining popularity due to decreasing costs and complexities.
Round Lots vs. Odd and Mixed Lots
An odd lot contains fewer than 100 shares or quantities that cannot be divided evenly by 100. Odd lots may be combined to form a round lot for smoother trading. A mixed lot includes both a round lot and an odd lot, such as an order for 198 shares.
Though odd lots have historically incurred higher costs, electronic trading has reduced these extra fees. However, certain exchanges prioritize round lots in specific market orders allowing immediate and preference-based trades.
Even fractional shares are now being traded, originally facilitating dividend reinvestment but now also supporting dollar-cost investing strategies. This can help investors consistently invest set amounts regularly in particular stocks or funds.
Who Is a Round Lot Holder?
A round lot holder is an individual or entity holding a round lot of unrestricted shares. Unrestricted shares can be transferred or sold without satisfying any specific conditions.
What Is a Board Lot?
A board lot refers to a standard number of shares set by an exchange as a single trading unit, often identical to a round lot, representing 100 shares or multiples of 100. However, this size may vary by exchange; for instance, board lots on Japanese exchanges are usually 1,000 shares.
Are Round Lots More Common?
Round lots are prevalent due to their lower trading costs. Yet, the rise of automated trading systems is making odd lots just as common as these systems streamline the trading process, mitigating the previously higher costs.
Conclusion
A lot constitutes the total units of a financial instrument traded on an exchange, coming in mixed, odd, or round forms. The exchange generally determines the size of a round lot, typically being 100 shares or multiples thereof. Trading round lots improves market efficiency and offers cost advantages due to bulk orders.
Related Terms: odd lots, mixed lots, fractional shares, trading unit.
References
- Charles Schwab. “What are wheat futures?”
- Fidelity. “Stock FAQS: International Stock Trading”.
