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Trading and Investment Terminology

Dutch Auction

Dutch auction is a method for pricing shares (often in an initial public offering) whereby the price of the shares offered is lowered until there are enough bids to sell all shares. All the shares are then sold at that price. 

 

A Dutch auction can be used in an IPO to figure out the optimum price for a stock offering. They are also used by government agencies for the public offering of Treasury bills, notes, and bonds.

 

For Example:

      Let’s assume there are 10 shares of stock for sale. A bidder offers $10 per share of stock for 8 shares. The next highest bidder offers $9 per share for 10 shares. The auction will end, as there are adequate bids to sell all shares. The price paid for all shares will be the lowest successful bid of $9. The first bidder will receive 8 shares for $9 (lower than her original $10 bid). The second bidder will receive the 2 remaining shares (less than her desired lot of 10 shares) at $9.

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