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A round lot is the normal trading unit used on most security exchanges. Lots of these types help to expedite the process of trading stock and bonds, since the unit establishes a basis for amounts that everyone connected with the purchase or sale understands. Along with the standard, there is also a round lot that is utilized to trade stocks that are inactive.
With stock options, a round lot normally includes one hundred shares. By setting this standard, it is easier to identify when smaller lots are offered, simply by noting that the offer is an odd lot, or a lot of shares that is less than one hundred. Investors who are not interested in odd lots immediately know when the offer involves multiples of round lots, and can make their purchasing decisions accordingly.
For inactive stocks, the round lot is normally a unit of ten shares. There are a number of reasons for this, including the fact that a lack of activity on the shares means that investors are likely to steer clear of them, since the chances for earning a return are non-existent on a stock that is not performing. By offering the inactive stock in smaller lots, there is more of a chance of moving the stock and possibly igniting at least some interest.
With bond issues, a round lot also establishes a standard. In most situations, that standard is in terms of price per par value. The price is usually stated in terms of United States dollars, such as in a lot of $1,000 US Dollars (USD) or $5,000 USD. This approach makes it much easier for investors to quickly calculate the earnings potential of a bond issue, and determine if the investment is worth the time and money required to secure the bond.
One benefit to purchasing a round lot is that the broker fees are normally more competitive. Since the round lot represents the standard in the marketplace, brokers offer better rates on handling transactions for investors. The less popular odd lots, by comparison, are much more likely to incur a higher fee per transaction.
From an accounting standpoint, the round lot makes the process of evaluating the current worth of a portfolio a little easier to calculate. Since the lots tend to be in even numbers, investors can quickly note that they control ten round lots of a given stock, or a total of one thousand shares. Multiplying this even number by the current value per share quickly yields information about the total worth of the shares, and how much the investor has earned or lost when compared to the original purchase price of the lots.
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