What Is a Material Amount?
In the context of trading and investments, a material amount is the degree to which a security's price changes over a certain time period—to the extent that it confirms or refutes a trader's original prediction about the security's performance.
In a more general sense, a material amount can signify any sum or figure worth mentioning, as in account balances, financial statements, shareholder reports, or conference calls. If something is not a material amount, it is considered too insignificant or trivial to mention.
- A material amount is the amount that a security must change in order to confirm or deny a market opinion or trade idea.
- Predicting the material amount for a given strategy can be important for a profitable trading system since it helps to prudently manage losses and gains.
- The exact number that is considered a material amount will vary for each trading scenario and financial case.
Understanding Material Amount
The material amount a security moves either validates or confounds a trader's projections. If the material amount confirms the projection, the trader should continue pursuing the trading strategy they based their predictions on.
But if the material amount is a move that goes against the trader's initial projection, the trader should reassess their trading approach. More pragmatically, the move should trigger a stop-loss trade, to minimize any losses resulting from the inaccurate projection.
Outside of trading, a material amount is a sum that is of some consequence. For instance, if a company loses $2,000 on mishandled inventory, it would not typically be a material amount. But if it lost $200,000 in inventory, it would represent a material amount.
There is no one universal material amount for a trade or strategy; the exact number that is considered a material amount is different for every trade. As a result, what would be viewed as a favorable material amount for one instrument or security may be considered insufficient for another one.
Traders must determine what they deem a significant and therefore acceptable degree of variance in the movement of the security price with each new investment they make, and take immediate action should the numbers move outside those perimeters. Identifying this acceptable movement range makes it easier to determine what action to take as prices fluctuate a little throughout the trading day.
While the exact numbers vary, the range of a material amount must be big enough to be deemed significant by common-sense standards. In the case of stock, some slight movement throughout the trading day would probably not be of much interest to company shareholders and as such would probably not be shared in any meeting with investors.
Only if the material amount shifts enough to indicate that the share prices are definitely moving according to predictions (or even exceeding them), or that prices are moving in a direction dramatically different from those predictions, will any sort of announcement occur.
How the Material Amount Affects Trading
When the material amount confirms that a trader's estimates of a security's movements and prices are accurate, it can act as a rationale as grounds for buying or selling more units of that security (shares of a stock, or bonds, or whatever the security is) than originally planned. On the other hand, if the material amount is not in keeping with the original predictions, traders may protect their interests by initiating a stop-loss order, which effectively limits the amount of money they can lose if the prices continue on the contrary direction.
Since accuracy in projecting price movements is key, many investors and traders make use of technical analysis as well as their own instincts to determine a material amount. This, in turn, makes it easier to decide on the action to take when that movement does not coincide with the performance as originally estimated.
It is often thought that predicting the material amount can be more important to a profitable trading system than actually predicting the price movement correctly. Traders who set this number wrong in their systems risk being stopped out early or taking too much risk.