Welcome to the latest post in our Learn About The Stock Market (Series). Today we are going to discuss the Odd Lot Theory. What is the Odd Lot Theory? How can I use the Odd Lot Theory to make more money?
What is the Odd Lot Theory
What do you think the biggest difference is between large and small investors?
Large, or institutional investors, are professional money managers that buy and sell large amounts of stock. They work for university endowment funds, state pension funds, and mutual funds. When large investors buy stock, they purchase in lots of 100 shares of stocks (or 5 bonds). For example, a large investor may buy 10,000 shares, or 25,000 shares.
Small investors, on the other hand, are folks like you and myself who make purchases for our personal accounts. We can’t always afford to buy a full lot, so we buy an odd lot (such as 47 shares). For example, on May 20th, 2013, Apple (AAPL) closed at 442.93. To buy 100 shares, I would have to pony up $44,293. When I rolled over my last 401k, I only had $48,000. I would have been crazy to put it all into one stock.
The larger difference between large and small investors, though, is emotion. Large investors use logic while we are driven by fear and greed…or so the theory goes. The Odd Lot Theory basically states that small investors always get it wrong. We buy high and sell low.
One of my former clients provided a good example of this. He got out of the market in 2002 when the market was tanking and then got back in the market when it was skyrocketing. He was scared when the market was near the bottom and sold everything at a loss and when his fear subsided and greed started taking over, the market was near it’s peak and he started buying again.
How Can I Use the Odd Lot Theory to Make More Money
How can you and I learn about the stock market and prove the Odd Lot Theory wrong? We need to fight our natural instincts. When the headlines start booming that the market is unstoppable and that we are near record highs, stick to you plan. Do not get greedy. When the news is predicting doomsday, stay strong my friend.
If you have trouble with this advice, here are a couple of tips to help.
- Turn off the news and close your browser. If you forget about the market and don’t stay up to date on it, you can’t fear it.
- Hire money managers. In your 401k, you can chose a target date fund. In your IRA, choose, Mutual Funds and other managed funds. Yes, you may have to pay a bit more for these funds, but those extra fees could help you avoid some disastrous mistakes.
You can contribute to this series - learn about the stock market – by sharing what you do to avoid the “buy high sell low” small investor mindset. Share your strategies in the comments section below.