Sometimes referred to as an odd lot or an uneven lot, a broken lot is a bank of shares of stock that are less than one hundred shares for most types of stock, or less than ten shares of a stock that is thinly traded. Since this form of trading is considered to be a little out of the ordinary, brokerage houses usually employ a few different rules to dealing with a broken lot.
Generally, shares are traded in what is known as a round lot. A round lot is defined as a bank of one hundred shares of stock. When the deal involves a transaction that is less than 100 shares of stock, most brokerages will calculate both the charges associated with the actual transaction at a different rate. Along with the transaction charges, the broker is likely to apply a higher commission rate to the transaction as well.
While there is undoubtedly a higher expense associated with trading or purchasing a broken lot, there can be some advantages as well. For investors that are attempting to secure as many shares of a given stock as possible, seeking out and buying a broken lot can sometimes be easier to manage than securing round lots. This is because brokers tend to promote round lots, and are sometimes much less proactive in promoting a broken lot. This can create some opportunities for an investor with a specific investment strategy in mind.
A broken lot can also be a great way for a new investor to begin building a portfolio. This is especially true for investors who have limited funds to invest in the acquisition of shares. Because the smaller lots of both thinly traded stock and other forms of stock contain less shares that a round lot, they may be more affordable, even with the higher broker charges and commissions. As the value of the portfolio grows, the investor may be able to move away from acquiring broken lot shares, and focus more on acquiring round lots of shares.