What is a Unit of Trade?

Osmand Vitez
Osmand Vitez
Businessman giving a thumbs-up
Businessman giving a thumbs-up

A unit of trade is the smallest amount of an item, or a singular item, an individual can purchase. This unit is common in the investment markets, where an individual or business purchases an item in hopes that its value will increase. Examples for a unit of trade include one share of stock, a contract for purchasing options, or a set unit for a commodity, such as a bushel of wheat or ounce of gold. The purpose of using divisible units is to accurately price the goods included in an economic transaction.

In traditional economic terms, the unit of trade represents the value of an item for a stated price. Because economic transactions require a price for two parties to agree upon when conducting business, the price must be attached to a fixed unit of goods. While many transactions can include a variable amount purchased by the buyer, the single unit of trade has a fixed cost based on the value of the item or the cost to produce the item. The number of units is necessary to complete any economic transaction between two parties.

The investment market uses the economic concept for a unit of trade to ensure that investors are of aware the single price for one share or contract. The investor can then multiply this per unit price by the total number of share or contracts they desire to purchase, which equals the total investment in a company. The singular form of a unit and its price also represents the information necessary to trade goods between multiple individuals. Without this information, no understanding for the value of an item is possible because the number of units is not available.

Another purpose for the unit of trade figure is to have a standard unit of measure for trade among different regions, whether domestic or international. While countries may experience two different units of measure — such as metric versus standard — they can create a standard unit of trade that removes this subjectivity. When trading stocks on an open exchange, a company may agree to list its stock in terms of the local currency, such as dollars or yen. Domestic investors purchasing these units may then need to convert them into their own currency in order to have an acceptable trade value. This may result in a currency exchange difference, where the investor must pay an additional fee in order to convert his money into the value (unit of trade) in which the investment is valued.

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