What is a Blockage Discount?
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 stock are introduced into the market at once, the blockage discount typically comes into effect.
How Does a Blockage Discount Work?
When traded securities have a value of over $200,000, this can be called a block trade. A block trade often involve the trade of more than 10,000 shares in the bond market. Block trades refer to exchange of large number or amount of securities.
In a block trade, it is possible for depression in price to occur, often times, this is as a result of low market volume. When traders are in haste to trade off their shares of stocks in a bond market despite low market volume, there is tendency for market price to fall. To avoid depress in price, traders can give away their large securities in bits over a period of time.
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 traders – 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.