Can someone please explain the point of a dutch auction and what it achieves versus a fixed price offer?
Say for example, shares are available as follows:
5 @ $2
4 @ $1.75
3 @ $1.50
2 @ $1.25
1 @ $1.00
If I want to buy 6 shares are an average price of $1.50, I’m best undertaking a dutch auction according to the text book.
However, if I go to the market and bid $9 for 6 shares, i.e. fixed price at $1.50, won’t I also get the same outcome as although there’s only a volume of 3 priced at $1.50, the 3 priced below it will also be happy to sell at $1.50?
dutch auction is basically the best price at which you’lll be able to buy/sell your shares at the lowest price (when buying) or highest price (when selling) which will fulfill your entire order. The bids are ranked from highest to lowest and everyone pays the price at which your entire order would be filled. It’s explained much better here: http://www.investinganswers.com/financial-dictionary/stock-market/dutch-auction-1277
hahaha, hope that helps.
If you were to go to the market and bid, there’s a chance your order might not get filled, or it wouldn’t get filled at 1.50 exactly (most likely lower since others are willing to buy at a lower price). What dutch auction allows your to do is guarantee that you an average price of 1.50 since that’s the price everyone would be getting.
The question in the mock concerned a repurchase however and the answer given specifies that a dutch auction starts at the bottom rather than the top of the demand table. Sorry - I should have made clear - but hence my question.
I’ve always looked at a dutch auction as finding the minimum price that you’re willing to pay (for what supply you want) and then giving that price to any of the ones below it (even if they’re asking less) – I’m not sure I understand the concept entirely, but that’s what I’ve learned it to be.
Clarity would be nice though as to why someone would prefer that over buying @ the lower prices – perhaps that’s the only way to obtain the desired quantity?
I’ve always looked at a dutch auction as finding the minimum price that you’re willing to pay (for what supply you want) and then giving that price to any of the ones below it (even if they’re asking less) – I’m not sure I understand the concept entirely, but that’s what I’ve learned it to be.
Clarity would be nice though as to why someone would prefer that over buying @ the lower prices – perhaps that’s the only way to obtain the desired quantity?