Clearing Price

Just about everything having to do with pricing goods and services must answer to the laws of supply and demand. The same holds true in the buying and selling of securities.

Obviously, the seller wants to get the highest possible price and the buyer wants to pay the lowest possible price, just like the practice of negotiating shmata at a flea market. Using a “bid” and “ask” process, a clearing price is agreed to that is usually the highest price the buyer was willing to pay and the lowest price the seller was willing to accept.

The term comes from the market being “cleared” so the transaction can take place.

Bob offers $23.50 each for 10 intentionally hand-ripped jeans; the seller wants $25 for them. Bob comes up in price to $24.20. The seller asks $24.40. They settle at $24.30, which is the clearing price for the jeans.

When there are lots of buyers and sellers in the marketplace, reaching a clearing price can happen quickly. For debt that is considered “distressed,” as with stock in a company filing for bankruptcy, there will be fewer buyers and it will take longer to reach a clearing price.

Harken back to when flat screen TVs first came to market. They were very expensive and had only a few “early adopter” type buyers. As the prices came down over time, demand increased. An adjustment took place to find the right clearing price—not too high so that no one is interested in buying or not too low so the manufacturer can’t make a profit or won’t be able to keep up with production to fill the demand.