DEFINITION of 'Job Lot'
A job lot is a futures contract with a commodities trading volume smaller than the levels required in regular contracts. These contracts, or lots, exist to add liquidity to futures exchanges by allowing "smaller" participants to enter the marketplace. A job lot can also be used to describe custom manufacturing orders that are batched together to increase efficiency and quality.
BREAKING DOWN 'Job Lot'
The general term "job lot" describes any situation in which a small amount of a material or product is produced at one time and sold as a single unit. In finance, any commodities futures contract in which the underlying commodity is denominated in a smaller amount than normal is considered a job lot. In the manufacturing sector, the production of a small batch of custom product is known as a job lot.
Job Lot in Commodities Trading
A commodity futures contract is an agreement between a buyer of goods and a producer of goods that outlines the delivery of a specific commodity on a future date at an agreed-upon price. A futures contract is considered a job lot when the agreement between the buyer and seller for the delivery of a commodity has a quantity below the normal limits for a commodity futures contract.
Precious metals are often bought and sold on commodities futures contracts. For example, a commodities exchange may issue silver futures contracts denominated in 5-ounce increments. If the exchange agrees to enter into a commodity futures contract with a buyer below the 5-ounce minimum, it is considered a job lot.
Job lots can be any size, and they differ based on the commodity and the specific futures contract. By offering job lots in addition to regular contracts, exchanges aim to make the market more accessible to investors with low investment capital, thus adding to liquidity and exchange efficiency.
Job Lot in Manufacturing
All manufacturers try to standardize their products and their production capabilities. Bicycle manufactures, for example, may have machines that only produce two types of bike frames: male and female. This cuts down on production costs and increases production efficiency. However, there are occasions when a customer or group of customers require a custom order. These custom orders are called job lots.
To fill these orders and also maintain efficiency, manufacturers will batch all the custom orders together. Using the same example above, if riders in the Tour de France require a special type of frame, the bicycle manufacturer can adjust its machines all at once to batch produce the custom order. Afterward, it can change the machines back to standard operations. This is better than if the company produced one custom bike a week and had to change its machinery back and forth each time.