What Is an Auction Reserve, Examined in Detail

What Is an Auction Reserve - photo of a gavel
Bill Cascade   NEW 31/08/2019 00:00:00 Guides

When buyers and sellers take part in an auction, the term auction reserve is commonplace. 

When buying and selling on the marketplace, it’s vital to understand its terminology. You should also have a good idea of the reasoning behind such concepts. This way, you ensure you’re prepared when it comes to the financial side of this business!

Here we examine in further detail the principle of an auction reserve. We also consider the auction market as a whole and how you can make the very best of it. This will drive your buying and selling process here each time.

Understanding an Auction Market

Before we begin to understand an auction reserve, we need to consider the auction market as a whole. 

The auction market is the environment where competitions are facilitated between buyers and sellers. 

In its simplest terms, this is a place where buyers state the greatest price they wish to pay for an asset. Likewise, this is where sellers show the lowest price they’re willing to accept for such assets.

The Process of an Auction Market 

For auctions to be successful, they need a counterparty for each transaction. This happens courtesy of specialists who act as auctioneers. 

Specialist roles here vary for both on-exchange transactions and over-the-counter transactions.

In on-exchange transactions, auctioneers act as the middle person between buyers and sellers. Their goal is to match two parties who have listed the same or similar prices for an asset.

But this action differs from that of an over-the-counter, that is an OTC. Here those two parties will communicate directly with one another. This way, they aim to reach a censure on the buy and sell price between each other, without the help of an auctioneer.

The Different Types of Auctions

Auction Reserve - Types of Auctions - Photo of a blue button with word Bid on it

To present such assets for sale, there are three types of auctions that an exchange will hold. The type held all depends on the process of supply and demand, and the time of day. 

  • An Opening Auction

This auction type is typically determined by an asset opening price on an exchange. It does this by matching buyers with sellers. 

In this auction, the most traded figures become the price which the assets opens on the market at. 

  • An Intraday Auction

To match buyers with sellers, an intraday auction is usually held throughout the day. 

The price of an asset here is set in line with the demand within that particular session.

  • A Closing Auction

These auction types are commonly held at the end of a trading day. This is to determine the assets closing price before the closing of the market and the next morning.

Auction Reserve Explained in More Detail

Now we’ve offered a background to auction markets, we can look in further detail at the term auction reserve.

Auction reserve refers to price – that is the reserve price. This is the least a seller’s willing to accept as the winning bid. 

 

Rephrased, it’s also the highest price a buyer will pay for goods or services. 

Auction Reserve Is an Essential Factor in Trading

The auction reserve price works to protect a seller. It prevents bidders from offering a lower price than sellers are willing to accept at auction.

Yet, when the auction starts, the starting price will be noticeably lower. This is because it will attract more bidding. But, once the reserve price’s met, anything offered over is a bonus to the seller.

So, if a buyer is unwilling to meet this reserve price, they can merely walk away from the negotiation.

Additionally, if that reserve price is not met during the auction, a seller can also simply walk away. This is because they are not obliged to sell if it hasn’t been met. 

What’s more, a seller cannot under any circumstances raise the reserve price. They can if they wish too though lower it. 

Not Everyone Likes an Auction Reserve Process!

Many sellers like the idea of added protection when it comes to such transactions. But many buyers dislike the concept of reserve prices!

Nowhere is this clearer than when entering into such transactions online. This is evident on specific eCommerce platforms!

Some sites hold back the reserve price. This means auction bidders can be met with a constant Reserve Not Met message each time they place a bid. This will appear until the reserve has been achieved.

But some buyers dislike the uncertainty this creates. This is especially so about the minimum price required to win the auction. Some also get agitated at seeing the message continually and give up! Reserve prices also reduce buyer possibilities of winning auction items at bargain prices. 

Examples of the Auction Reserve Process

Auction Reserve - Examples - Photo of notes with word Example on them

In action, the auction reserve process is straightforward to set up. 

One example is where you have three buyers looking to fill orders for shares of a company called ACE. They offer respective buy prices of $5.00, $5.60, and $5.30.

Meanwhile, three sellers submit offers to sell their shares of the company ACE at £4.40, $5.00 and $4.70.

In this situation, an auctioneer would work to match the $5.00 seller and $5.00 buyer to trade. Thus, the current market price for the stock would then be set to $5.00.

Once this $5.00 transaction’s done, those other buyers and sellers need to readjust their values. This means trading by the $5.00 prices set by the auctioneer. 

A second example of the auction reserve process is one based on an auction house. Asked to work on behalf of a recently liquidated company, they’re tasked to sell equipment.

Top of the list is an industrial cooker which was used to create their main products. The auction firm decides on a $300,000 reserve price.

This figure’s taken from the trustees of the firm’s estate. It’s based on their recommendation of what the machine is now worth. 

But, as with most auction houses, the auctioneers open the bidding for this machine at $150,000. 

During the auction, several bidders express an interest and bring the bid to $200,000. But, before final announcements, a rival company to the now-bankrupt firm bids at $250,000. 

Though this is the highest and final bid, the auctioneer removes the machine from an auction. This is because the reserve price hasn’t been met.

The Pros and Cons of Setting an Auction Reserve

Though some buyers don’t think so, there’s a massive advantage to setting an auction reserve. This is as opposed to any such disadvantages.

Advantages:

When the item or service is of a high price, you’re assured of some protection. Thus, you aren’t left under the mercy of bidders. So, you have ensured that should the bids remain low, you don’t end up selling at a lower price. This means not selling lower than what your item or service is worth!

Disadvantages:

You’ll need to consider your reserve price beforehand. This may mean seeking professional help to determine the most realistic price. Thus, you come away with a sale as opposed to a load of low bids. If your item or service doesn’t sell at the reserve price, you’ll have to look at re-listing it. This also means completing the process all over again. This incurs extra charges. But it can also look unprofessional – especially when it states you’re relisting.

Final Thoughts on Auction Reserves 

Concluding, if you’re considering an auction reserve, here are two tips to ensure profit:

Consider how urgently you want to sell

This is a crucial point to consider, as it can affect your auction reserve decision. Those products or services you need to quickly sell may work better with a lower reserve price. This way, you are more likely to get the bids. Yet, with more time, you may prefer to set a higher reserve and not have to sacrifice price for speed. 

Whatever your decision, aim for a higher price and take your time. This is the better all-round financial strategy.

Prepare to be flexible with your reserve price

Or, you may also want to weigh up your options when it comes to the actual auction reserve price itself. 

In some cases, you may find the auction ends with a bid that doesn’t match your reserve – but is close enough to it. If you don’t accept this bid, you then face having to re-list and start another auction. 

Consider implementing reserve price flexibility at some level. This should be ideally done before placing your product or service up for auction.

 

More articles

US Dollar Under Pressure On Weak Economic Data

Bill Cascade   NEW 09/10/2019 00:00:00 Forex

The US dollar is struggling for direction, having lost momentum on weak employment data. The greenback has registered impressive gains, in recent months, as other majors currencies continued to edge lower...

Buy to Open Definition, Explained in Detail with Example

Bill Cascade   NEW 08/10/2019 00:00:00 Guides

There are four types of options that are commonly used in the industry. Alongside buy to open, these include buy to close, sell to open and sell to close. Here we look at precisely what the basic definition of buy to open means, alongside offering an example of it at work. By analyzing the term further, we can provide a better understanding...

Swiss Franc Eyes Fresh Gains On Safe Haven Appeal

Bill Cascade   NEW 07/10/2019 00:00:00 Forex

The Swiss franc has lost some ground against other major currencies in recent trading sessions. For starters, it is trading at two-week lows against the Euro, which has tumbled to two-year lows in recent months. While the weakness of the Swiss franc stems from weak economic data, a bounce-back could be in the offing going forward...

Turkish Lira On The Recovery As Swedish Krona Woes Persist

Bill Cascade   NEW 06/10/2019 00:00:00 Forex

Turkey's government remains optimistic about the Lira appreciation, against the dollar, over the next three years. Economic forecasts by the finance ministry indicate the government expects the country’s economy to expand by 5% next year...

Argentines Turn To the Polls To Avert Economic Crisis And Peso Volatility

Bill Cascade   NEW 03/10/2019 00:00:00 Finance

The country is struggling with one of the highest levels of inflation at 54%. High inflation levels have affected the way of life, as prices of goods continue to rise, and small businesses struggle to remain afloat... 

Free margin - Credit