Why are Market Lots Different for Different Stocks?
Market lots are the minimum number of stocks you can purchase in a single go for a particular listing. It varies for different stocks due to a combination of factors, including tradition, liquidity, share price, exchange rules, corporate changes, regulations, and market evolution. Understanding these factors is essential for investors to navigate financial markets effectively and make informed trading decisions.
Market lots are best explained as the standardised quantities used to buy and sell stocks on the market. Also known as trading lots or board lots, these are predefined units of shares that can be bought or sold by investors in a single go. Market lots for a particular stock are also unique as they accommodate the stock’s distinctive characteristics.
The market lot size is different for different stocks; while some stocks may have a market lot size of 10 shares, for others, the number can be in the hundreds. This means that you can only buy or sell shares in multiples of market lot size and not in a random number. For example, if stock ABC has a market lot of 150, you can either buy 150 stocks or a multiple of 150 in one go. The market lot for a particular stock is dependent on numerous factors like liquidity, share price, historical trading practices, regulatory considerations, etc. Let us understand this in detail.
Why understand market lot sizes?
Market lots provide investors with a common unit of measurement to keep trading simple and consistent. This translates to orderly and efficient trading that democratizes the stock market trading to all investor types, whether big or small. Also, market lots standardise the size of positions and help in maintaining price consistency and reducing risks. As an investor, you need to understand the market lot size as it has a direct bearing on trading decisions by influencing trading costs.
Market lot variability
For a holistic understanding of market lot sizes, we must first understand the factors that helps determine its size.
- Tradition Plays a Role: Many stocks follow a tradition when it comes to their market lot sizes. Just like a club that introduces its new members to a set of rules typically followed by its older members, these new stocks introduced into the market follow lot sizes that have been in place before. And even though some follow a set of new rules, the majority feel comfortable following a path already trodden.
- Liquidity Matters: When it comes to selling stocks, it can be difficult to set the right price. To avoid such a conundrum, market lot sizes are determined based on the liquidity of stocks. This means that popular stocks with easily available investors and that see a lot of trading usually have smaller market lots. At the same time, the not-so-popular ones have much higher market lots to make up for parity and profit margins.
- Price Tag is Important: For stability and parity, expensive stocks settle for smaller market lot sizes. This makes it possible for a larger pool of investors to trade in expensive stocks without having to spend a lot of money. Conversely, if you are eyeing stocks that are less expensive, chances are their market lots will be much higher.
- Exchange Rules: Stock market rules are set globally to ensure fair and transparent trading. Some of them include stock prices, minimum lot sizes, price limits, investor protection, etc. Market lots, as essential market elements, are also governed by such rules and can have large variances between individual stocks.
- Market Twins: Sometimes market lot sizes are determined directly by the people running the markets. These decision-makers often keep the same lot sizes between markets to ensure parity.
- Corporate Changes to Blame: Market lot sizes are often prone to changes within the companies, which can decrease or increase their value. While a stock split in the company reduces the market lot size, a reverse stock split has the opposite effect of increasing the number.
- Market Regulations: Constant changes in the stock markets are maintained by the regulators to ensure fairness of trade and standardise rules for traders and businesses alike. These regulatory changes can modify the market lot sizes for a particular stock, especially in emerging markets, to add stability and mitigate manipulation.
- Market Evolution: Market lots are prone to changes over time due to shifts in market conditions, trading technology, as well as the preference of investors. Exchanges regularly monitor these changes and adjust market lots to accommodate them.
To sum up
Market lots are different for different stocks due to a complex set of reasons including shifting market dynamics, regulatory considerations, and historical practices, among others. This variability in market lot takes the unique characteristics of each stock into consideration and ensures order and efficiency in the markets.
For you, market lots have a direct bearing on trading costs and directly impact trading accessibility. To gain a firm understanding of the market lot variability theory, you must first comprehend the intrinsic factors at play. From an investor’s perspective, this will help you make informed decisions and navigate the financial markets with ease.