An odd lot is a trade of fewer than 100 shares, typically made by private investors. While there used to be a penalty for odd lot trades, brokers now handle them without extra fees. The odd lot theory, which suggests that odd lot traders make poor investment choices, was popular in the 1970s.
In investment terminology, an odd lot is typically an investment that trades fewer than 100 shares. These transactions are more often done by private investors, rather than large commercial companies. While there was a penalty for making an odd lot trade, current stock brokers typically handle them without charging any extra fees. This type of trading created an investment hypothesis called the odd lot theory that was popular in the 1970s.
Most investments are made in increments of 100 shares, called round lots. An odd lot is any trade that falls below this number of shares. Many private investors can’t afford or don’t want to invest in a full lot, so they typically choose to take smaller trades. These lots may also be called broken lots or irregular lots.
Some brokers charge an eighth of a point per share when dealing with odd lot transactions. The commission is usually called differential. Loading a differential isn’t as common a practice as it once was. Computer-based trading often makes small trades as simple as big ones, so the commission may not be necessary.
On the other hand, some traders may charge this fee simply because they don’t get the same commission on smaller trades as they do on larger ones. This problem is more likely to occur if the odd lot is a stock with a low purchase price. For example, if a stock trades at a dollar, the commission for even a round lot of 100 shares may not be enough for some brokers to trade it without charging a commission.
These actions were historically important. They were usually traded, not through a regular broker, but through an odd lot broker. Ordinary stockbrokers often brought odd lots to the specified broker, who would then place the trade. The broker usually got paid by charging differentials.
For the most part, odd lots are bought by private investors rather than large companies, so many people have looked for patterns in this type of trading. People who wish to understand them usually want to determine if it has any effect on the market or if it can be used as a signal of market trends. Some believe that the study of buying or selling odd lots may reflect the attitude of private investors to the market.
Another hypothesis, called the odd lot theory, suggests that this type of trader is not well informed about market conditions and therefore may make poor investment choices. People who subscribe to this theory would often encourage investors to study what odd lot traders do and do the opposite. The theory assumes that the opposite choice would be the right choice to invest. This theory was popular in the 1960s and 1970s, but has since lost much of its following in financial circles.
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