What is a Blockage Discount?

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.

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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.

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