In the share market, the financial instruments are traded in Lot size. A lot size refers to a standard amount of a particular tradable asset that is allowed to trade in the stock exchanges.
The size of a lot may vary depending on the price of a share of a particular company, or it may be country-specific.
Generally, they are traded in a lot size of 100 but if in case a share is costly then it may be sold in a lot size of 10 also.
In the share market, shares are purchased, held, and sold in a fixed lot size.
There are two types of lot sizes
- Round lot — A collection of a hundred stocks or financial entities is termed as a round lot.
- Odd lot — A group of stocks that are less than a hundred in numbers is called an odd lot.
A trader can buy any number of lot sizes according to his capital and risk-taking capabilities. If someone buys 1200 shares, then they are collectively termed as 12 round lots. And if someone buys 1050 shares, then they are called as a 10 round lot and one odd lot for 50 shares.
Different financial entities are traded in different lot sizes. For example, bonds are traded in lots of $10,000 having face values of $1000 each.
Futures and options are traded in a lot of 100 shares; however, the price of the underlying asset is fixed for the lot size of the contract.
And finally, forex is traded in 3 different lot-size viz- micro, mini, and standard.
Now for buying and selling lots and contracts, there are certain things that a trader needs to do but before doing that, let us first know about types of contracts.
There are two types of contracts — one is forward contracts, and another one is future contracts. Trading in forwarding contracts is also known as spot trading.
In this type of contract, the commodity is brought at an aggregable price between the two parties, and the delivery of the lot is done on the same day.
On the other hand, a different type of contract is a futures contract. In this, the product is quality and quantity of the product is negotiated at the time of signing of the contract, and the price is also negotiated on the same day, but the payouts are made on the future day at which the delivery is taken.
These contracts are also termed as options and futures in commodities dealings.
Now we will learn about how to buy and sell a lot or a contract.
How to Buy a Lot?
Buying a lot needs a trading account that is registered with a broker. One has to open a Demat account for purchasing a lot.
Once when the account is opened, then one has to decide whether he has to buy a lot of stocks, forex, indices, or commodities.
After deciding about the type of financial instrument, one has to decide the lot size of the quantity.
Choosing the lot size of financial instruments in different lots has already been described in this article above.
So, after choosing the lot size, one should confirm whether he wants to buy the option or future?
Now if someone wants to buy the future of a company asset, then one entity of the future means 100 shares of that company, that are to be traded based on a future.
And if someone wants to buy options, then he can do so with put and call options. These options are perfect constraints for a trader who plays a day trading game.
Options are purchased by entering the stick price. Strike price is the price at which the security is purchased.
How to sell a Lot?
Selling an option is done in spot markets, but for future contracts, one has to wait until the maturity of the contract. At the maturity of the contract, the seller can sell his future contract, and that is called a set of the contract.
If someone wants to sell his future contract on expiry, then he can get the profit or undergo loss depending on the closing price of that share on that particular day.
And if someone wants to sell it before the maturity of the contract, then he can communicate with the broker, and that will find him the buyer.
And after all, the seller can sell his contracts on the current market prices of that particular future and bear the loss of the profit accordingly.