Lot Size Meaning
The lot size is the number of units of securities/ assets traded on the stock exchange. Since trading in a single unit is not viable, the shares or the number of units are brought in a lot size. Its application changes for different capital markets that, include options, futures, forex, bonds, etc. The aim of lot size is to determine the minimum quantity of a product or asset that can be traded in a single transaction.
The lot size impacts the direction in which the market moves and affects the demand and supply in an economy. Therefore, it is essential to decide the lot size using the risk management tool. The larger lot size makes it riskier for the investor, and the smaller one does not generate revenue.
Table of contents
- Lot Size meaning
- Lot Size in trading explained
- How to calculate?
- Examples
- Lot size vs. leverage
- Frequently Asked Questions (FAQs)
- Recommended Articles
- The lot size is the number of units of securities/assets traded on the stock exchange. Trading in a single unit is not viable, so the shares or number of units are brought in a lot size.
- Calculating a lot size involves considering several variables, including risk percentage, stop loss and account balance.
- The lot size in the futures and options market is the value of the underlying asset expressed as the number of contracts in a transaction. Derivatives include ETFs, stocks, and market indices.
Lot Size In Trading Explained
A lot size is a fixed unit of assets or securities traded on the stock exchange. While trading in the share market, lot size refers to the number of shares an investor sells or purchases in a single transaction. In the futures and options market, the value of the underlying assets is denoted as the number of contracts in a transaction. ETFs, shares, and market indices are examples of derivatives (underlying assets).
When investors trade in the share market, they buy and sell shares in the number of units, also called the lot size. Before online trading, traditional trading had a lot size of 100 units. However, the odd lot size has become very common these days, where the unit is less than 100 or more than 100 but is not divisible by 100.
There are different types of lots depending on the different capital markets:
- Options:The lot size in options trading refers to the contract size of one derivative security. Generally, options trading has a lot size of 100 underlying shares. This helps analyze the price per unit an investor pays while trading options.
- Forex lots:Foreign currencies are also traded in the lot. The standard size of the forex lot is 100,000 units, but there are various mini, micro, or nano lots of 1000 and 100 units. The change in the currency relative to the other currency is measured in pips. The fluctuations in currencies are measured via pips that indicate the currency's rise or value relative to other currencies.
- Bonds:These are units of government securities/debt a person buys for an investment. Suppose the value of 1000 lots has a face value of $20 each per unit. The total of U.S. government and municipal bonds is $ 1 million currently.
How To Calculate?
A lot size can be calculated by considering risk percentage, stop loss, and account balance.
Determining the risk limit:Traders specify the risk in the dollar amount on each trade as an important step in determining the forex position. Usually, the risk factor is 1% of the account balance. The other factors keep changing depending on the type of trade.
The traders determine the portion of their margin that will limit the maximum loss to 1%.
Maximum loss = pip (the tool used to measure the change in one currency relative to another currency) *30)/ price] * lot size
Maximum loss for portfolio= 0.01 * margin
Lot size = 0.01*margin*price/ 30* pip
= contract size* trade volume* asset price
Examples
Let us look at some examples to understand the concept better:
Example #1
A standard lot of 100,000 units of the base currency and the current exchange rate is 1.24, which means a trader will have to pay USD 1.54 for one British pound. So the person will have to invest 100,000 £ with $1.54 to get 1,54,000.
Example #2
The market indices trading is also different. For example, the NIFTY 50 has three different contract sizes, i.e., standard, mini, and micro. The standard contract has a lot size of Rs.50, the mini contract has a lot size of Rs 35, and the micro of Rs. 10. When the NIFTY FIFTY is trading at 5000, the notional value of each contract is as follows:
- Standard contract: 5000*50= Rs. 250000
- Mini contract : 5000*35 =Rs. 175000
- Micro contract: 5000*10= Rs. 50000
Lot Size vs Leverage
The lot size is the fixed number of units of the stocks, Exchange Traded Funds (ETFs), options, futures, or forex currencies. In contrast, leverage is the amount taken from the broker to invest in the capital market, and the returns on the capital are paid off as a loan.
It is the smallest amount of units of security that can be traded. In contrast, leverage is the borrowed amount of money used for investment but is riskier and more profitable on the same side.
Frequently Asked Questions (FAQs)
1. What is lot size in forex?
The term "lot size" describes the quantity or increment of a specific asset or product. Different products are frequently offered in various sizes. In the past, only specific lots of 100, 1,000, 10,000, or 100,000 units could be traded in spot forex.
2. How to calculate pips with lot size?
The abbreviation "pip" stands for "point in percentage" and refers to the smallest unit of change in the exchange rate of two currencies. A given trading position's "pip value" is the value brought on by a one-pip change in the applicable currency exchange rates, all other things being equal.
3. What is lot size in real estate?
In real estate, it indicates the size or area of land where a particular piece of land is located. It can also mean the total area of property within the boundary lines.
Recommended Articles
This article has been a guide to Lot Size and its meaning. Here we explain the topic in detail with how to calculate it with examples, & compare it with leverage. You may also find some useful articles here:
- Odd Lot
- Flotation Cost
- Bid-Ask Spread
