Also known as a unit of trading, a trading unit is the number of securities that an exchange requires be traded as a single block. The purpose of this type of unit is to make the process of trading on various exchanges a little simpler by ensuring that the number of bonds, shares, or other types of securities involved in a given trade meet the basic criteria of those exchanges. A trading unit may be in the form of what is known as a round lot or an odd lot.
The round lot represents the most common example of the trading unit. A typical round lot that is traded on a stock exchange will include one hundred shares of a given stock. This means that if an investor wishes to buy a thousand shares of that stock, he or she will purchase ten units or round lots in order to fulfill the order. In some cases, a single trading unit is the smallest amount that may be traded on a given exchange, meaning it is not possible for an investor to purchase less than a hundred shares of the stock at a time.
A less common example of the trading unit is the odd lot. This type of unit is usually composed of less than one hundred shares of a specified stock. Individual exchanges make the determination of whether to trade odd lots, or limit trading to only round lots. One benefit associated with this type of trading unit is that investors may purchase odd lots as a means of incrementally acquiring greater interest in a given stock. Since a number of investors tend to overlook odd lots, those who are willing to purchase less than a hundred shares at a time can gain control of a number of shares without calling a great deal of attention to their efforts.
While most exchanges do follow the same basic pattern in defining what is meant by each of these trading unit types, it is important for the investor to identify how a given exchange classifies a stock offering as a round lot or an odd lot. This will make it easier to for the investor to not only consider the potential of the investment in general, but also make it possible to decide if the number of shares included in the trading unit are acceptable for the amount of money involved in the purchase.
