A trading unit is the amount of securities required to trade as a single block on an exchange, either in the form of a round lot (typically 100 shares) or an odd lot (less than 100 shares). Investors should be aware of an exchange’s classification of a stock offering to make informed investment decisions.
Also known as a trading unit, a trading unit is the number of securities an exchange requires to trade as a single block. The purpose of this type of unit is to make the process of trading on various exchanges a little easier by ensuring that the number of bonds, stocks or other types of securities involved in a given trade meets the basic criteria of those exchanges. A trading unit can be in the form of what is known as a round lot or an odd lot.
The round lot is the most common example of a trading unit. A typical round lot that is traded on an exchange will include one hundred shares of a particular stock. This means that if an investor wishes to buy one thousand shares of that stock, he will buy ten units or round lots to fill the order. In some cases, a single trading unit is the smallest amount that can be traded on a given exchange, meaning it is not possible for an investor to buy fewer than one hundred shares at a time.
A less common example of the trading unit is the odd lot. This type of unit is usually made up of fewer than one hundred shares of a given stock. Individual trades determine whether to trade odd lots or limit trading to round lots only. An advantage associated with this type of trading unit is that investors can purchase odd lots as a means of incrementally acquiring greater interest in a particular security. Because a number of investors tend to overlook odd lots, those willing to buy fewer than a hundred shares at a time can gain control of a number of shares without paying much attention to their own efforts.
While most exchanges follow the same basic pattern in defining what is meant by each of these types of trading units, it is important for the investor to identify how a given exchange classifies a stock offering as round lot or odd lot. . This will make it easier for the investor to not only consider the potential of the investment overall, but also make it possible to decide whether the number of shares included in the trading unit is acceptable for the amount of money involved in the purchase.
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