A brief on stock trading
Have you ever wondered about being a shareholder of a company? It is not that difficult to become a shareholder of an institution. You can buy shares of any public companies at affordable prices through stock market trading. Stock trading is the action of buying and selling shares of a company using real money, thus generating capital for the company. The person with shares of a company is a shareholder. You can sell the shares to another person whenever you want. There will be many brokerage firms that act as a middleman for trading with a small fee. You can trade the shares on your national stock exchanges. There is a lot of things to know about the stock market. In this article, let us discuss the odd lot theory in stock trading in brief.
What is odd lot theory?
Odd lots are the groups of shares less than 100 in number. The odd lot theory is based on the assumption that small investors will not have a proper understanding of the investment strategies, and they will be buying stocks focusing on selling them soon for profits. The theory believes small investors will start odd lot sales as soon as they buy them, thus liquidating some shares in the market. It adds that if the odd lot sales are on the rise, it will be a better time to buy stocks, and if more people are buying these stocks, it is a better time to sell.
Assumptions in odd lot theory
- Individual investors will have less knowledge, and they are less educated about the process of investing.
- Individual investors will have no or a little influence in the arena.
- There are several assumptions in odd lot theory, although there are no evident proofs. Some of these assumptions are as below.
- Inexperienced investors will buy shares of small groups less than 100.
- Odd lot investors (small investors) will sell the stocks in a quick span.
- Odd lot sales will start and stimulate more people to buy stocks, thus creating demand for stocks.
- Potential and experienced investors will buy stocks and trade them in round lot sizes in multiples of 100 (100, 500, 1000).
- Buying shares in lot sizes as multiples of 100 will increase pricing efficiency.
- Lot sizes that are not a multiple of 100 are also odd lots (105, 289, etc.)
Present relevance of odd lot theory
Although investors considered this as a thing in the past, the theory is losing its importance over the years. Many researchers are finding it irrelevant in present conditions. Some of the reasons for the theory becoming less important are as follows.
- Small investors are becoming knowledgeable with the help of online resources and other facilities of the information age
- Individual investors are investing heavily on mutual funds that generate money in the hands of institutional investors
- The increase in the usage of computerized trading systems and high-frequency traders
- Many individuals started using exchange-traded funds