Understanding Blockage Discounts in Stock Trading

Blockage discount – also sometimes referred to as the blockage factor – is the discounted price or value the market gives stocks when a block of shares is sold. The exact number of shares constituting a block varies. However, any time more than 10,000 shares of a company’s stockCommon StockCommon stock is a type of security that represents ownership of equity in a company. There are other terms – such as common share, ordinary share, or voting share – that are equivalent to common stock. are introduced into the market at once, the blockage discount typically comes into effect. In the bondBondsBonds are fixed-income securities that are issued by corporations and governments to raise capital. The bond issuer borrows capital from the bondholder and makes fixed payments to them at a fixed (or variable) interest rate for a specified period. market, a “block” is characterized by $200,000 worth or more of securitiesTrading SecuritiesTrading securities are securities purchased by a company for the purpose of realizing a short-term profit. The securities are issued within the company's industry, being introduced into the market at one time.

How a Blockage Discount Works

A blockage discount is closely tied to supply and demandSupply and DemandThe laws of supply and demand are microeconomic concepts that state that in efficient markets, the quantity supplied of a good and quantity. The law of supply and demand says that within the market there is a certain amount of demand for a good, service – or in this case, shares of a company. When the market is flooded with a significant increase in the supply of shares, the value per share goes down. This is because of the greater access and availability of the shares without a corresponding increase in demand. In reality, it means that demand also decreases because the shares are so readily available.

Sellers looking to cash in on their large block of shares must recognize the imbalance created when they flood the market with a surplus of shares. For this reason, the seller also must recognize that the market will lower the value of shares, meaning the original share price goes out the window. Sellers looking for a quick turnaround are often penalized for their hastiness to earn a huge sum, and it often forces them to take a significantly discounted cut per share.

Blockage Discount Percentages

In most cases, the market will discount a block of shares anywhere between 1% and 15%, although there is the potential for a 0% discount as well if the stock is in particularly high demand. Market analysts and tradersSix Essential Skills of Master TradersJust about anyone can become a trader, but to be one of the master traders takes more than investment capital and a three-piece suit. Keep in mind: there is a sea of individuals looking to join the ranks of master traders and bring home the kind of money that goes with that title. – in order to accurately determine the size of the discount – must effectively study all historical information about the company, the market’s response to similar block offers in the past, and discounts given to blocks of shares from similar companies.

It’s also important for such individuals to study the economy as a whole, as well as the industry the company operates in. Understanding the market’s response to the industry and companies within it in the near-recent past is a helpful bit of information for analysts to get a better understanding of the scope of the potential blockage discount for a company within a given sector.

Final Word

Blockage discounts – while not destined to occur – are a fairly common response from the market. When a seller changes the supply and demand balance by introducing a large group of shares into the marketplace, it is a nearly foregone conclusion that the market will respond by assigning less value to each share. Sellers should keep this fact in mind and avoid selling large blocks of shares when possible.

Related Readings

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