Disadvantages Of Trading Blocs - You Could Lose Money

For anyone who may be new to stock market investing, one of the most difficult things to overcome is all the new terms you'll have to learn. One of the things that you may have heard, and that may have sounded confusing and intimidating, is 'bloc trade'. You don't have to be intimidated by the term or the concept just make sure that you understand what it means and what the disadvantages of trading blocs are.

These trades are commonly executed by various fund managers and large investment groups and you don't need to panic and sell every stock you own since these trades are not necessarily indicative of the overall trends in the stock market.

When you think of bloc trades it's a common misconception to think that it either involves a lot of investors or millions of shares, but in reality it only needs to be 10,000 or more shares that are being traded to be considered a bloc.

Even though bloc trades can be done by all kinds of investors, it's usually done by fund manager or an investment group. Since these types of investors are buying and selling for thousands of clients at one time they do bloc trades often. While there is on limits on the number of bloc trades that can be done, due to the sheer volume of shares being traded they can be blocked if it seems like the volume of the trade could have a detrimental affect on the market as a whole.

To illustrate what this means here is an example: lets say that a fund manager wants to sell a million shares but there are only enough buyers for 250,000 shares. At that point a a market specialist will step in and buy these large blocs to hold for a little while until there are enough buyers for all the shares. If they didn't do this the price of the stock would plummet since there would be way more supply than demand for the stock.

Since such a big influx of shares from one company can actually have an impact on the market, or 'move the market' it is closely watched by other investors. If the bloc is bought up by multiple small investors than this is considered to be bad news since the small investors aren't as strong of an influence as the 'big boys'. If, on the other hand, another big institution buys up the whole bloc it is just considered to be a redistribution of the companies shares and not a big deal.

The major disadvantages of trading blocs is that it can move the whole market if the bloc is big enough and if you are a smaller investor and a big fund manager trades large blocs of the same stocks you own, it will drive down the price of your stock since it will be seen as a potential problem with the company or the future price of the stocks when they are unloaded by the big investment houses.