Understanding Dutch Auctions: How They Work & Their Use in IPOs

A Dutch auction is a technique that is sometimes used to determine the market price of stock during an initial public offering. Here are the basics of the Dutch auction and how it works.

Dutch Auction

The Dutch auction is named after a method that was used to sell Dutch tulip bulbs during the Dutch Tulip Craze. With this method, they will start out trying to sell the stock at a high price. Bidders will then be given the opportunity to bid on the security at that price. If no one bids on the stock at that particular price, the auctioneer will lower the price and give them another opportunity to bid. The auction will continue until someone decides that they want to bid on the stock. At that point, that will be the market price that is assigned to the stock.

Use

This method of bidding is utilized by the United States Treasury. It is also becoming more common in the corporate world today. Google actually utilizes this method of bidding whenever they issue stock. With this method, companies can determine what the actual value of a stock is going to be in the market place and what people are willing to pay.