It is one of the three commonly known lot sizes; the other two are mini-lot and micro-lot. Free trade volume forex Forex Trading Us.
What is a 'Standard Lot'
A lot is the standard number of units in a trading security. In the financial markets, a lot represents the standardized quantity of a financial instrument as set out by an exchange or similar regulatory body. When investors and traders purchase and sell financial instruments in the capital markets , they do so with lots. A lot is a fixed quantity of units and depends on the financial security traded. For stocks, a lot is the number of shares that is purchased or sold in one transaction.
The standard minimum stock order that can be placed through an exchange without incurring higher commission fees is In the stock market a lot of shares is known as a round lot. A round lot can also refer to a number of shares that can evenly be divided by e.
Trading with odd lots , that is less than shares or a number of shares not divisible by , commanded higher commission costs in the past. However, the emergence of electronic and online trading platforms has reduced or eliminated the premium paid for trading in odd lots. In this case, his order will be broken into two separate orders comprising of one round lot and one 70 odd lot.
His order will be filled in two sections as well so when he checks his order status on his trading dashboard, he will see shares filled at a certain price and another section that has 70 shares filled at a certain price. The prices at which each lot is filled may be the same or different, depending on the liquidity for the stock.
Similar to stocks, the board lot for exchange-traded securities, such as an exchange-traded fund ETF , is shares. The bond market is dominated by institutional investors who buy debt from bond issuers in large sums. Any bond purchase of less than the standard lot is referred to as an odd lot. In terms of options , a lot represents the number of contracts contained in one derivative security.
In other words, the lot for one options contract is shares. One option contract gives him the right to purchase the lot of shares at the agreed strike price. With such standardization , investors always know exactly how many units they are buying with each contract and can easily assess what price per unit they are paying. Without such standardization, valuing and trading options would be needlessly cumbersome and time consuming.
When it comes to the futures market , lots are known as contract sizes. The underlying asset of one futures contract could be an equity, a bond, interest rates, commodity, index , currency, etc.
The value of the forex lot applied to a trade will have a bearing on the risk profile for the account. The risk to an account is a function of the account size, stop loss , currency traded, risk percentage applied and the Lot size.
This is shown in this demonstration using a forex position size calculator. What lot size should be use to keep his account from being exposed to too much risk? We refer to a position size calculator to do the Maths for us:.
We can see clearly that the trader can only use a maximum of 15 micro lots 0. If the trader intends to take more than one trade, then the lot size must be divided by the number of trades to come up with a new lot size measurement which will stick to the limits of risk.
We can see that the forex lot is an integral part of what traders must consider before putting on a trade. Traders must use lot sizes that conform to acceptable risk limits. Lot sizes will therefore have to be considered when choosing a broker, when funding the account and definitely before putting on a trade position. Broker choice is important as some brokers may only permit certain trade sizes on their platform. Sufficient funds will also be needed to assume certain levels of forex position sizing.
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