Blockage Discount

Eat too much banana, matzo, and sponge at a restaurant, and they take 10 percent off the bill because of, well, you know...the vast amount of texting you'll do...in private.

Believe it or not, there are some instances where a stock or bond is not priced at the fair market value. Normally, a stock is valued at the average of the highest and lowest price on a given day. So why would anyone in their right mind sell at a “blockage” discount?

The clue is in the word “block,” where the number of shares is so large it could skew the whole market for that stock. This goes back to the good ‘ol laws of supply and demand, where the greater the supply of a stock in the marketplace, the lower the price per share.

So if a wealthy couple with a lot of stock in one company is getting divorced, or Risky Medicine, Inc. gets sued and needs to come up with a lot of cash, they might sell at a blockage discount below market value to get rid of the shares quickly.

But they could also risk having the price go down if they decided to hold onto the shares for a longer time and sell in smaller lots, since the price could change over time.

So either way, a seller of a large block is probably facing a discount.

Related or Semi-related Video

Finance: What is a Block Trade?22 Views

00:00

Finance a la shmoop.. what is a block trade? yeah you think this was the yellow Marvin [A monopoly board]

00:09

Gardens trio bartered for the green Pennsylvania Avenue set but it's not

00:15

instead a block trade happens when a huge, you know block yes clever naming

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there of shares needs to get sold think company founder just got divorced and [Man and woman sitting on a sofa]

00:27

old husband wants the dough fast she just wants to get rid of him you know

00:31

lose 185 pounds so of her 28 million shares she or rather her bank or brokers

00:37

put together a group of a half a dozen buyers who then buy the stock in a clean [Stock is dusted]

00:41

block trade there's a strange paradigm here sometimes companies shares are

00:46

thinly traded or not liquid meaning that there isn't a ton of volume every day in

00:51

the stock and large institutions wanna buy in big like to the tune of 5 million [Big institutions buy stock]

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shares but if they buy 50,000 shares a day in the market well they'll likely

01:01

move the stock from say 18 bucks a share to 25 bucks a share by the time they're

01:06

done buying so sometimes supply of block trades is constrained and the trade

01:12

usually with price negotiated well beforehand goes off at a premium to

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where it was regularly trading like that eighteen dollar figure maybe implies a

01:22

block trade that happens at 20 bucks the seller is usually happy because if they

01:27

dump the shares at fifty thousand a day into the market while they'd likely [Dump truck dumps stocks on the floor]

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drive down the stock price to fifteen dollars or less in the process got it?

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and this way they got a $2 premium above that 18 bucks 20 minus eighteen two

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dollars there yeah and the institution is happy because now they own the [Institution smiling]

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however many millions of shares that they own at a twenty dollar base price

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instead of something likely much higher if they've gone into the market and

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bought em, so that's when supply is constrained in a thinly traded low

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volume in demand stock much more common as a block trade where there's a whole

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lot of supply coming on board and not nearly the demand of buyers or investors

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to take over the stock so it trades at a meaningful discount to whatever price it

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was trading at like in the eighteen dollar a share case well maybe that

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block trade happens at 17.20 or 16.50 or

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thereabout so that's a block trade and here's a blockhead yeah ask your parents [Blockhead figure appears]

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if you don't get the reference here...

Find other enlightening terms in Shmoop Finance Genius Bar(f)