Block deal is a transaction between two parties (generally institutional investors) of a minimum quantity of 5 lakh shares or a minimum value of Rs. 5 crore. It is a method by which big funds sell or buy stocks in large quantities. News of a huge block deal is enough to send retail investors into a buying frenzy expecting the stock price to rise. But is a block deal good for the stock? Does stock price rise after a block deal?
Why is a block deal needed?
First let’s understand what happens in a block deal. Simply put, a block deal is an exchange of stocks on a large scale. So, what is special about a block deal? A block deal allows an institutional investor to buy a large quantity of stocks at a fixed price. The keyword here is “fixed price”. Buying large quantities of stocks at a fixed price from the open market is extremely difficult. This is because the act of buying stocks causes the price of the stock to increase. This is not a problem when retail investors are buying a stock because the quantities of stocks involved are generally low. However, when a large quantity of stocks are involved, just the act of buying the stock can increase the stock price drastically. This is the reason why institutional investors love to buy stocks through block deal. To learn more why institutional investors are at a disadvantage when buying stocks, visit this article – 5 reasons why retail investors have an advantage over mutual funds!
Does stock price rise after a block deal?
Despite popular opinion that a block deal is good news for the stock, a block deal doesn’t affect the price of the stock at all! A block deal is just one of the crores of transactions (although a big transaction) which happen in the stock market during the trading period everyday. In every block deal, there is one buyer and one seller. Seller transfers the large quantity of stocks to the buyer in exchange of the money which the seller receives. If the stocks get transferred from one FII to another FII, then the total FII holdings remain the same. There is absolutely no reason for the price to change.
Does a block deal indicates that the company has a bright future?
No, a block deal doesn’t mean that the company has a bright future. Remember that a block deal involves a buyer AND a seller. The buyer is taking (or increasing) a position in the stock because of the expectation that the company will do well in the future causing the price to go up. The seller is exiting (or reducing) the position in the stock because of the expectation that the company might not do well in the future. Both buyer and seller are big investors who have opposite views (or maybe have opposite financial situations). Sometimes, a smart buyer might be buying stocks from a foolish seller. Other times, it might be the clever seller getting out of a bad deal by making the buyer a scapegoat. Regardless of the situation, a block deal gives no indication whether the company is going to perform well in the future or not.
What should retail investors do in such stocks?
If a stock which you own recently had a block deal, remember that the only thing which happens in a block deal is an exchange of stocks from one big investor to another big investor. It is impossible to figure out who amongst the buyer and seller is the smarter investor. The block deal should not be the cause for the retail investors to run after the stock in the hope of a quick profit. However, it is up to the reader to decide to buy or sell their stocks because of a block deal.
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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