Learn something new every day
More Info... by email
In investment terminology, an odd lot is typically an investment that exchanges less than 100 shares. These trades are most often made by private investors, rather than large trading firms. Although there used to be a penalty for making an odd lot trade, current stock brokers typically handle them without charging any extra fee. This type of trading created an investment hypothesis called odd lot theory that was popular in the 1970s.
Most investments are made in 100 share increments, called round lots. An odd lot is any trade that falls below this number of shares. Many private investors cannot afford, or do not wish to invest in, a full round lot, so they typically choose to make smaller trades. These lots may also be called broken lots or uneven lots.
Some brokers charge a fee of one-eighth of a point per share when they work with odd lot transactions. The fee is usually called the differential. Charging a differential is not as common a practice as it used to be. Computer-based trading often makes small exchanges as simple as large ones, so the fee may be unnecessary.
On the other hand, some traders may charge this fee simply because they do not get as much commission on smaller trades as larger ones. This issue is most likely to arise if the odd lot is a stock with a low purchase price. For example, if a stock is traded at one dollar, then the commission for even a round lot of 100 shares may not be enough for some brokers to trade it without charging a fee.
These shares were historically important. They were typically traded, not through a regular broker, but through an odd lot broker. Regular stock brokers would often bring odd lots to the specified broker, who would then make the trade. The broker would usually get paid by charging differentials.
For the most part, odd lots are purchased by private investors rather than large firms, so many people have looked for patterns in this type of trading. People wanting to understand them typically wish to determine if it has any affect on the market, or if it can be used as a signal of market trends. Some believe that studying odd lot purchases, or sales, can reflect the attitudes of private investors about 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 bad 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 for investing. This theory was popular in the 1960s and 1970s, but has since lost much of its following in financial circles.
One of our editors will review your suggestion and make changes if warranted. Note that depending on the number of suggestions we receive, this can take anywhere from a few hours to a few days. Thank you for helping to improve wiseGEEK!