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Odd Lot Theory

What is 'Odd Lot Theory'

A technical analysis theory/indicator based on the assumption that the small individual investor is always wrong. Therefore, if odd lot sales are up - that is small investors are selling stock - it is probably a good time to buy.

Explaining 'Odd Lot Theory'

This approach assumes small investors have a low risk tolerance and tend not to hold a stock for the long-term.


Further Reading


Odd-lot transactions around the turn of the year and the January effect
www.jstor.org [PDF]
… Theoretical evidence regarding the tax motive for trading is reported in Dyl (1979) and Constantinides (1983) … and buying activity that cause the ratios of sales to purchases of odd lots to change … We assume that odd-lot trading is a good proxy for trading by individual investors …

What's not there: The odd-lot bias in TAQ dataWhat's not there: The odd-lot bias in TAQ data
papers.ssrn.com [PDF]
… Theoretical evidence regarding the tax motive for trading is reported in Dyl (1979) and Constantinides (1983) … and buying activity that cause the ratios of sales to purchases of odd lots to change … We assume that odd-lot trading is a good proxy for trading by individual investors …

Odd-Lot Trading in the Stock Market and Its Market ImpactOdd-Lot Trading in the Stock Market and Its Market Impact
www.jstor.org [PDF]
… Theoretical evidence regarding the tax motive for trading is reported in Dyl (1979) and Constantinides (1983) … and buying activity that cause the ratios of sales to purchases of odd lots to change … We assume that odd-lot trading is a good proxy for trading by individual investors …

Technology and learning: Automating odd-lot trading at the New York Stock Exchange, 1958–1976Technology and learning: Automating odd-lot trading at the New York Stock Exchange, 1958–1976
www.jstor.org [PDF]
… Theoretical evidence regarding the tax motive for trading is reported in Dyl (1979) and Constantinides (1983) … and buying activity that cause the ratios of sales to purchases of odd lots to change … We assume that odd-lot trading is a good proxy for trading by individual investors …

Do measures of investor sentiment predict returns?Do measures of investor sentiment predict returns?
www.jstor.org [PDF]
… Theoretical evidence regarding the tax motive for trading is reported in Dyl (1979) and Constantinides (1983) … and buying activity that cause the ratios of sales to purchases of odd lots to change … We assume that odd-lot trading is a good proxy for trading by individual investors …

A theory of price variability and trading volume: The case of odd-lot trading.A theory of price variability and trading volume: The case of odd-lot trading.
elibrary.ru [PDF]
… Theoretical evidence regarding the tax motive for trading is reported in Dyl (1979) and Constantinides (1983) … and buying activity that cause the ratios of sales to purchases of odd lots to change … We assume that odd-lot trading is a good proxy for trading by individual investors …

Investor sentiment and stock returns: Evidence from TurkeyInvestor sentiment and stock returns: Evidence from Turkey
www.tandfonline.com [PDF]
… Theoretical evidence regarding the tax motive for trading is reported in Dyl (1979) and Constantinides (1983) … and buying activity that cause the ratios of sales to purchases of odd lots to change … We assume that odd-lot trading is a good proxy for trading by individual investors …

Odd-lot trading in US equitiesOdd-lot trading in US equities
www.sciencedirect.com [PDF]
… Theoretical evidence regarding the tax motive for trading is reported in Dyl (1979) and Constantinides (1983) … and buying activity that cause the ratios of sales to purchases of odd lots to change … We assume that odd-lot trading is a good proxy for trading by individual investors …

Economic experiments and the construction of marketsEconomic experiments and the construction of markets
books.google.com [PDF]
… Theoretical evidence regarding the tax motive for trading is reported in Dyl (1979) and Constantinides (1983) … and buying activity that cause the ratios of sales to purchases of odd lots to change … We assume that odd-lot trading is a good proxy for trading by individual investors …



Q&A About Odd Lot Theory


What is odd lot theory?

Odd lot theory is a technical analysis theory that assumes small investors are always wrong.

How does one use Odd Lot Theory?

One uses it by taking advantage of market inefficiencies that occur when there are large orders placed for a security or commodity.

Why would someone want to take advantage of market inefficiencies?

To make a profit from the price movement caused by these large orders being placed.

What is the purpose of Odd Lot Theory?

The purpose of Odd Lot Theory is to help investors make better decisions about their investments.

Why do odd lot sales tend to be an indicator of market direction?

Because it is assumed that small investors have a low risk tolerance and tend not to hold a stock for the long-term.

What do you need to know before using this theory?

You need to know how much money you have and what your investment goals are.

What does this approach assume about small investors?

It assumes they have a low risk tolerance and don't hold stocks for the long term.

Is this approach effective in determining market direction?

Yes, it can be effective in determining market direction.

Who created Odd Lot Theory?

Gordon Scott created Odd Lot Theory.