What Is a Job Lot?
A job lot, in finance, is a commodities futures contract in which the underlying commodity is denominated in a smaller amount than the typical standard lot. Futures allow investors to buy commodities, such as gold or silver, and commodities trading is typically done in standard lot sizes. However, futures exchanges may offer trades to be done in non-standardized lot sizes–called job lots.
Job lots are helpful because they add more trading volume or liquidity to the markets. Also, investors with smaller amounts to invest have the opportunity to invest in futures that might otherwise be too expensive with standard lots. A job lot can also be used to describe custom manufacturing orders that are batched together to increase efficiency and quality.
- A job lot is a commodities futures contract in which the underlying commodity is traded in a smaller amount than the standard lot.
- Job lots can be any size, and they differ based on the commodity and the specific futures contract.
- Job lots are helpful because they allow retail investors, with smaller amounts to invest, access to futures trading.
- A job lot can also be used to describe custom manufacturing orders that are batched together to increase efficiency and quality.
Understanding a 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 the financial markets, investments are often sold to investors in round lots, meaning a standardized number of shares or contracts. When an investment sale is less than a standard lot, it's referred to as a job lot. In the manufacturing sector, the production of a small batch or a customized amount of product for a customer is also called 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 and at an agreed-upon price. Futures are derivative contracts since they derive their value from an underlying commodity, such as crude oil, corn, wheat, gold, silver, and copper.
Futures contracts are typically standardized and trade on a futures exchange. 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.
For example, precious metals—such as silver—are often bought and sold as commodities futures contracts. A commodities exchange might issue silver futures contracts denominated in 5-ounce increments. If the exchange agreed to enter into a commodity futures contract with a buyer below the 5-ounce minimum, it would be 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. The additional trades also add liquidity and trading volume, which helps investors have enough buyers and sellers in the market for when they want to trade.
Job Lot in Manufacturing
All manufacturers try to standardize their products and their production capabilities. Bicycle manufacturers, for example, might 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 requires a custom order, and these orders are called job lots.
To fill these orders and also maintain efficiency, manufacturers will batch all of 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 per week and had to change its machinery back and forth each time.