Orderly Market

  

Categories: Trading

A market stops being orderly when a situation gets drastically out of hand and it becomes difficult to match buyers with sellers. Prices can go into freefall, like in a stock market crash. Or they start skyrocketing, like in those situations where you suddenly need to stock up on water before the hurricane comes.

You own shares in a high-flying tech stock specializing in the development of self-driving cars. It turns out that the CEO of the firm was secretly murdering people and using their blood to fuel its vehicles. When news breaks, the stock plummets. The market for those shares cease being orderly.

On the other side of the spectrum, you have an orderly market. It's one where buyers and sellers find each other without much drama. Prices may fluctuate, but everything takes place in a calm and reasonable way. You know, a normal trip to the grocery store, or your average day on Wall Street.

Related or Semi-related Video

Finance: What is a Dutch Auction?3 Views

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Finance a la shmoop what is a Dutch auction? and not to be confused with a

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Dutch oven what okay we're moving on all right [Boy in bed and oven appears on bed]

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leave it to the Dutch to do things in reverse order like shoes are supposed to

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be soft and comfy right but no they had to do wood so normally you'd auction a

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Mona Lisa starting at 10 million bucks and then someone would bid 12 million [Mona Lisa painting appears]

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and then 20 million and then 50 million eventually it sell for like 312 million

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bucks or whatever price she commanded right but no not the Dutch for them

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things go the other way and this system has actually been used in a few famous

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and or infamous IPOs of stocks well basically a Dutch auction is a public

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offering where the offering price is decided by asking for bids the bids are

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kind of mulled over to find the price at which securities can then all be sold

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like you started a high number and then you go lower and lower until you have [Man discussing dutch auctions]

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enough demand to then clear the sale in fact Google did a Dutch auction when it

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went public and things did not go so well but well you know over the time the

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company bailed itself out pretty good there right all right well a normal IPO

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is kind of normal auction in and of itself investors indicate interest and

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prices are gathered and gradually increased by capital markets people at

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the bank along with volumes of shares mutual and hedge funds that want to

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invest and eventually when they say fifteen million shares have enough

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demand at oh say 20 bucks a share well the bank then executes on the IPO to

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raise 300 million smackers for the you know smacker company different

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but many IPOs zoom upwards the first day of trading smacker no [Rocket launches into the air]

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relation to Schmucker was priced at 20 and closed the day at 30 so how do you

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think that made the company feel well the company would guess that it could

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have sold the shares at 30 instead of 20 like those knuckleheads at the bank it

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left 10 bucks a share on the table and times 15 million shares that's 150

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million dollars it could have raised which it didn't so to counter that

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perceived unfairness every now and then companies going public spin things

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around they wear wooden shoes to start their meetings and in this case we only [A pair of wooden shoes appear]

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might start the bidding at 40 bucks a share and if they hear

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crickets they bring it down to 35 maybe more crickets and well then it's at 30

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there's noise now actively interested investors and maybe they raise the money [People celebrating in a crowd]

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at 30 bucks but what happens the next week or weeks or months if company just

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performs as they said they would ie not awful and not amazing well at that point

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the board investors start to just sell their shares and it's likely that the 30

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bucks a share price declines maybe a lot as almost no investors will have made [Share price declines]

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money in the IPO they took risk to invest in

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it's called low sponsorship and the street is fast to turn its back on it so

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even though smacker has a higher share price at their IPO in this scenario than

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in the previous one, well it ends up hurting them in the long run because

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they just don't have a lot of people who follow the stock and later on down the

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line when the company really wants its stock to have a high price they have a

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currency and they can go buy up all their competitors and so on and so on

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well the stock doesn't have sponsorship so it doesn't have the high prices just

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doesn't have a lot of demand not a lot of investors who care how the stock does

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that's the penalty when you do a Dutch auction yeah and you might even say for [Penalty stamped on company]

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smackers well it ends up smacking them right in the you know...

Up Next

Finance: What is an Auction Market?
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What is an Auction Market? Auction markets are the common stock exchanges. They allow buyers and sellers to enter bids and offers; trades occur whe...

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