Stock Swap

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS '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
  1. Swap Execution Facility - SEF

    A trading system or platform that enables many participants to ...
  2. Amortizing Swap

    An exchange of cash flows, one of which pays a fixed rate of ...
  3. Replacement Swap

    A substitute for a swap arrangement that is terminated before ...
  4. Reverse Swap

    An exchange of cash flow streams that undoes the effects of an ...
  5. Total Return Swap

    A swap agreement in which one party makes payments based on a ...
  6. Swap

    Traditionally, the exchange of one security for another to change ...
Related Articles
  1. An Introduction To Swaps
    Options & Futures

    An Introduction To Swaps

  2. The Advantages Of Bond Swapping
    Bonds & Fixed Income

    The Advantages Of Bond Swapping

  3. The Evolution Of ETFs
    Mutual Funds & ETFs

    The Evolution Of ETFs

  4. What is a debt/equity swap?
    Investing

    What is a debt/equity swap?

Hot Definitions
  1. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  2. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  3. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  5. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center