Material Amount: What it Means, How it Works

What Is a Material Amount?

In trading and investments, a material amount is the degree to which a security’s price changes over a certain time period, confirming or refuting a trader’s original prediction about the security’s performance.

In a general sense, a material amount can signify any worth mentioning sum or figure, such as 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.

Key Takeaways

• A material amount is the amount that a security must change to confirm or deny a market opinion or trade idea.
• Predicting the material amount for a strategy is important for managing losses and gains in a profitable trading system.
• The exact number considered a material amount varies for each trading scenario and financial case.

Understanding Material Amount

The material amount validates or confounds a trader’s projections. If it confirms the projection, the trader should continue pursuing the trading strategy.

If the material amount goes against the trader’s projection, the trader should reassess their approach and consider a stop-loss trade to minimize losses resulting from the inaccurate projection.

Outside of trading, a material amount is a sum of consequence. For instance, if a company loses $2,000 on mishandled inventory, it would not typically be material. But if it lost $200,000 in inventory, it would represent a material amount.

Special Considerations

There is no universal material amount for a trade or strategy; the exact number considered a material amount differs for each trade. Traders must determine a significant degree of price variance that is acceptable for their investments.

While the exact numbers vary, the material amount must be significant enough for common-sense standards. Slight movements throughout the trading day may not be of interest to company shareholders and may not be shared in meetings with investors.

Only if the material amount indicates that share prices are moving according to predictions or in a dramatically different direction, will announcements be made.

How the Material Amount Affects Trading

When the material amount confirms a trader’s estimates of a security’s movements and prices, it can act as a rationale for buying or selling more units of that security than originally planned. If the material amount doesn’t align with the predictions, traders may protect their interests with a stop-loss order.

Accuracy in projecting price movements is key. Many investors and traders use technical analysis and their instincts to determine a material amount, making it easier to decide on the appropriate action when the movement doesn’t coincide with the original estimates.

Predicting the material amount is often more important than predicting the price movement correctly. Traders who set this number incorrectly risk being stopped out early or taking excessive risk.