When I first started to learn about the stock market as a Financial Advisor, I thought I wanted to be a stock picker. I knew I had much to learn about the stock market, but I had about $5,000 in my IRA and wanted to prove myself. I looked for a stock that was on the rise and had familiar products. I bought 56 shares of Apple stock at $87 a share. The stock had been on the rise and had fallen. I was positive it would rise again. Shortly after I bought the stock, it rose 20% and I sold it to reap my gains…and because I was scared that I would just as quickly lose that money. The stock later peaked at 700 and it is currently hovering at 450. The Odd Lot Theory is Proven.
Learn About the Stock Market: Odd Lot Theory
After some more training and lessons on the stock market, I became aware of the odd lot theory. An “Even Lot” is 100 shares of a stock or 5 shares of a bond. An odd lot is any amount different that that…like 56 shares. Odd lots typically have higher trading fees because it is harder to find someone who wants to buy 56 shares versus 100 shares. With most stocks in the $30 – $40 range and higher, it is tough for a smaller, individual investor to buy blocks of 100 shares. On the converse, could you imagine someone managing a multi million dollar fund or pension buying 387 shares? No, they would buy 400 shares.
With this in mind, “odd lot trades” typically represent individual investors while even lot trades typically represent larger, more sophisticated investors.
Definition of Odd Lot Theory
The odd lot theory states that when purchases of odd lots increase, the market is about to go down. When you and I start buying, the market is about to go down. When purchases of odd lots decrease, the market is about to go up. The market is about to rally when you and I start to sell our stocks. This is the opposite of what individual investors like you and I want. To use this theory, buy when odd lot purchases are going down and sell when they are going up. This will allow you to to buy low and sell high.
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