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.