Often new investors just entering the market have minimal proceeds to invest. This can also apply to long-term investors who have limited incomes or who have a number of long-term holdings they will not sell. If someone has under $10,000 or even $5,000 to invest, depending on the stock's price, she may not be able to buy 100 shares of a stock. However, in today's digital age buying fewer than 100 shares can be cost effective.
In the stock market, when an investor places an order for 100 shares or multiples thereof, this is referred to as placing a "round lot." One hundred shares is the conventional unit in which stocks are bought and sold. Before computers, all trading in stock was done on paper by specialists. Trading in lots, or groups, of 100 made the math simpler.
Additional Odd Lots Cost
Because of the additional effort and associated costs involved to aggregate the odd lots, those placing odd lot orders had to pay extra. Sometimes the extra amounts nullified the purchase’s justification. For example, a regular 100 share trade may have cost $50 but an odd lot trade would cost $105. If the buyer thought the share price would not rise enough to cover the additional $110 cost on the purchase and subsequent sell of the stock, then the buyer would forgo the trade.
Computerized trading and the subsequent deregulation of the brokerage industry changed the entire odd lot assemblage process. Now, instead of individuals running around trying to find other shares to match their sub-100-share lot with, computers do this. Computers detect odd lots in microseconds and match them with others. Because the time and effort involved for odd lots is no longer any different than for 100-share lots, brokerage firms no longer charge a different fee. Discount brokerage fees which can be as low as $7 a trade make the cost of buying fewer than 100 shares of a stock extremely cost effective.
A share of stock costs $103. An investor believes the stock will increase to $130 in the next year. However, she only has slightly over $1,000 to invest. She buys 10 shares for $1,037, the cost of the shares plus the trading fee. If her assumptions prove correct, she will sell her ten shares in a year for $1,300 less the $7 trade fee for a net of $1,223. She will have trading gains of $1,223 less $1,037 or $186 -- definitely worth the trade.
Return Matters More
An investor may have sizable assets to invest. However, a stock like Berkshire Hathaway’s A stock costs over $175,000 per share in mid 2013. With $1 million to invest, an investor could only purchase 5 shares at this price, 95 shy of the traditional 100-share lot. However, if the stock more than doubles from its five year low, then the investor would reap significant benefits on her investment. Therefore, it is not the number of shares purchased that matters, but the return expected on the net purchase cost.
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