Stock Swap

What is a 'Stock Swap'

The exchange of one asset for another. A stock swap occurs when shareholders' ownership of the target company's shares are exchanged for shares of the acquiring company as part of a merger or acquisition. During a stock swap, each company's shares must be accurately valued in order to determine a fair swap ratio.


A stock swap can also occur when a stock option is exercised and the original shareholder exchanges their existing number of shares to receive a new greater amount.

BREAKING DOWN 'Stock Swap'

For example, in 2010, utility companies Mirant and RRI Energy merged to form GenOn Energy. Each Mirant shareholder received 2.885 shares of RRI Energy in the stock swap. This means that for every share of Mirant owned, the investor would receive 2.885 share of RRI energy.


Starbucks has also done a stock swap for its employees. Employees were give an opportunity to buy stock options in the company at a discounted price. These options had a exercise price well below the market price, and therefore had a high value. Two years later, the share price of Starbucks dropped below the exercise price, which made these stock option worthless. Starbucks offered its employees the opportunity to swap the stock options by taking the now worthless stock option from them and exchanging them for new stock options which possessed a higher value.

RELATED TERMS
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  2. Forward Swap

    A swap agreement created through the synthesis of two swaps differing ...
  3. Swap Bank

    A financial institution that acts as an intermediary for interest ...
  4. Swap

    A derivative contract through which two parties exchange financial ...
  5. Swap Ratio

    The ratio in which an acquiring company will offer its own shares ...
  6. Swap Dealer

    An individual who acts as the counterparty in a swap agreement ...
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RELATED FAQS
  1. What would motivate an entity to enter into a swap agreement?

    Learn why parties enter into swap agreements to hedge their risks, and understand how the different legs of a swap agreement ... Read Answer >>
  2. When was the first swap agreement and why were swaps created?

    Learn about the history of swap agreements, the first swap agreement between IBM and the World Bank, and how swaps have evolved ... Read Answer >>
  3. Can bond traders trade on interest rate swaps?

    Read about interest rate swaps and why these transactions are performed by institutional actors in the bond market, not individual ... Read Answer >>
  4. What are some risks a company takes when entering a currency swap?

    Read about the risks associated with performing a currency swap, including counterparty credit risk in the event that one ... Read Answer >>
  5. How are swap agreements financed?

    Learn how swap agreements are now cleared by swap execution facilities and require the use of collateral margin to hold, ... Read Answer >>
  6. How do companies benefit from interest rate and currency swaps?

    An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular ... Read Answer >>
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