Posted in Finance, Accounting and Economics Terms, Total Reads: 725
Definition: Blockage Discount
It is defined as the discount on a security in anticipation of its low sale in the present market conditions. It means that the current market price of a block of stock is reduced owing to its low chances of selling in the current market. This discount is due to an unusually large amount involved. The discount price is decided by the parties involved in the transaction and takes into account market liquidity, size of the block, etc. This kind of transaction takes place away from the electronic market as well the open outcry.
Formula : blockage discount = current market price – discount price
Eg – suppose some trader has a block of 100 shares. Assuming that this is a huge block, it would involve a large amount of money if the trader wants to sell it. It might happen that there are no buyers for this block of share. Hence, the trader may have to reduce the price by a certain amount in order to sell the shares. This price will be reached upon negotiating with the buying party.