What is a round lot?
A round lot is a standard number of securities that will be traded on an exchange. In stocks, a round lot is considered 100 shares or a greater number that can be divided evenly by 100. In bonds, a round lot is usually worth $ 100,000.
Sometimes a round lot is called a normal trading unit and can be contrasted with an odd lot.
- A round lot is a standard minimum trade size for a security or asset.
- A large number of shares generally equals 100 shares or a multiple of 100 shares.
- A round lot of bonds has a value of $ 100,000 or a multiple of $ 100,000.
- Odd lots and smaller lots have become increasingly common due to technological advancements and demand from retail investors.
Understanding the round lot
Historically, a round lot of 100 shares has been the smallest order that can be placed through an exchange. However, that is changing. Today, so-called odd lots and fractional shares allow the execution of orders as small as a share on some exchanges or even a fraction of a share.
However, investment managers and institutions often buy stocks in large batches. Round lots often have lower trading costs and discounts apply for various round lot amounts.
Types of round lots
Round lots in options
In options markets, a round lot consists of 100 contracts in quoted put and call options. Investors can buy an options contract. Each of those contracts generally represents an odd number of shares.
Other markets, such as commodity markets, have their own convention for what is defined as a round lot.
Round lots in bonds
A round lot in bonds generally has a value of $ 100,000 in bonds or a multiple of $ 100,000. Any other quantity is considered an odd lot and incurs higher trading costs.
That said, innovation is ongoing in the bond market as well, and the mechanisms are evolving for smaller blocks and odd-lot trades.
Round lots vs. odd lots
A lot that consists of less than 100 shares or a lot that cannot be divided evenly by 100 is called an odd lot.
Odd lots are sometimes combined or grouped into round lots to facilitate trading. A mixed lot consists of a round lot and an odd lot. An order for 198 shares would be considered a mixed lot.
Historically, these odd lots or mixed lot exchanges have incurred higher trading costs, although improved e-commerce technologies have helped reduce additional fees for them.
However, odd lot trades may not be allowed or prioritized. Some exchanges may require only round lots for pre-specified market orders, including reserve orders. In these trading situations, orders are placed for transactions at a specific transaction price and preference is given to round lots.
Round lots generally carry lower trading costs and run faster, although trading odd lots is getting easier and less expensive.
Odd lot trading has become more and more common as technology improves. Even now you can trade fractional shares.
Split share trading was originally implemented to allow for the reinvestment of dividends. However, many brokerages now use it to allow their clients to use a dollar cost investment strategy. With this strategy, the client sets a personal goal of investing a certain amount of money, say $ 200, each month in a particular stock or fund, regardless of its price changes.
Fractional stock trading is becoming more and more popular and many online brokers now make it easy for any reason.