Odd Lot

What is Odd Lot in stock market and how does it impact trading?

The Odd Lot in trading refers to the order quantity that is lower than the defined Lot Size of a financial security. This means that the quantity that is being traded is less than the minimum quantity that needs to be specified in an order. The individual or the entity which trades the financial securities in Odd Lots is also known as an Odd Lotter.

Depending on the regulatory guidelines in a region, the trading of Odd Lots might or might not be allowed in a market. In addition, this kind of trading could also be restricted for some financial instruments and it could be permitted for other instruments. For example, trading of quantities that are lower than the Lot Size could be allowed for illiquid stocks.

Lot Size

In stock markets, the Lot Size refers to the minimum quantity of a financial security that can be traded in a single order. For the securities that have a defined Lot Size, the trader would need to buy/sell at least 1 Lot in the orders that are being placed.

If a higher quantity is needed than the defined Market Lot, then the quantity in the order can be selected in multiples of the defined Lot Size of the security. For example, 2 lots, 3 lots, 10 lots etc. could be traded.

For the securities listed on the Stock Exchange, the size of the lot is usually fixed and notified by the exchange for the different instruments. The Lot Size also depends on the regulatory guidelines and the type of instrument that is being traded.

Odd Lot example

Let us assume that a particular stock trades on the Stock Exchange in a fixed Lot Size of 100 shares. So, the minimum quantity for this stock that can be defined in an order is 100. And if a higher number of shares have to be traded, then multiple lots can be defined in the order.

For example, 2 lots will mean 200 shares, 5 lots will mean 500 shares, 9 lots will be 900 shares etc. The quantity to be traded will be in multiples of 100, because the Lot Size is 100 shares for regular orders.

Now, when placing the order for this particular stock, if a trader selects a quantity of less than 100 shares, then it is said that this is an Odd Lot order. For example, if the quantity in the order is 80 shares, then this is lower than the regular Lot Size of 100 shares.

Execution of Odd Lot trades

The idea behind the concept of Lot Size is that it helps in standardization of trading in the different financial instruments. It also helps the market regulators and the Stock Exchange to protect the Retail Investors and to restrict speculation in some financial instruments.

For example, to control excessive trading in the Commodity Derivatives market, the Lot Size for a commodity could be fixed in such a way that a very high Initial Margin might be needed for taking a trading position.

When trades are happening on the Stock Exchange, the placement of Odd Lot orders is not allowed in the regular market. Usually, the Stock Brokers reject the orders which contain a quantity that is not in multiples of the Lot Size.

Odd Lot trading

Since placement of such orders is restricted during the normal market trading, some Stock Exchanges have special Odd Lot Markets where such trading can be done with limited participants. Also, some Stock Exchanges host a separate session, which is purely dedicated for Odd-Lot trading. Earlier, the Odd Lot trades were also allowed for the physical share certificates and physical Derivative contracts.

Besides this, in many regions, the traders are free to buy or sell any quantity of shares in Over the Counter (OTC) markets. It is also possible to execute Odd-Lot trades, when doing off-market purchase or sale of shares (Refer: Step by step guide for off market sale of shares using CDSL).

Odd Lot after Corporate Actions

For investors, the Corporate Actions announced by companies are a common reason for receiving/holding Odd Lot shares. For example. suppose that for a particular stock, the Lot Size is fixed at 1. Let us assume that a trader holds 50 shares and the company declares a 2:3 Bonus Issue. So, the trader is entitled to receive the following new shares:

\(\frac{2}{3}×50=16 \frac{2}{3} \) shares

So, after receiving the Bonus Shares, the investor will hold 50+16 = 66 whole shares and a partial 2/3rd share. Since the Lot Size is fixed at 1, the 2/3rd share held by the investor will become an Odd Lot share and it can become difficult for the Odd Lot holder to trade this share.

Recently, many companies have chosen the option of cash settlement for Odd Lot shares, so that the investors get a quantity that is consistent with the Market Lot Size. So, in our above example, the company could transfer 16 shares to the Demat Account, and also transfer cash for the 2/3rd share, to the bank account of the investor.

Mixed Lot

A very similar concept in stock markets is the Mixed Lot trade. As explained above, the traders can also buy or sell a higher quantity of financial securities, than the quantity defined in the Lot Size. This is usually done by trading multiple lots of the financial securities. But in case of a Mixed Lot order, the trader selects an order quantity that is not a multiple of the Lot Size.

Example: Suppose that a Futures contract is made up of 200 shares as the underlying asset. So, the traders will typically be allowed to trade multiple lots with quantities like: 200, 400, 600, and so on. So, if an order is placed for a quantity like 290, which is not a multiple of 200, then it means that a Mixed Lot order has been placed.

Whereas in case of Odd Lot in share market, the selected quantity is lower than the quantity defined in the Lot Size. So, in our above example, if any order is for a quantity that is less than 200, then the order will be called an Odd-Lot order.

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