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A Dutch auction is a public offering auction in which bids for a stock offering begin at high prices and decrease until the price at which the total offering can be sold is determined.

The U.S. Treasury uses Dutch auctions to sell securities. Dutch auctions can help companies optimally price their IPOs​, as well.

Suppose ABC Corporation is issuing an IPO with the plan to sell 1,000 shares. The company uses a Dutch auction in which investors enter bids for the number of shares they want and the price they’re willing to pay. One investor may bid $100 for 100 shares; another might offer $95 for 500 shares; another offers $90 for 400 shares.

Once all bids are submitted, the price each bidder pays is based on the lowest bid that will sell the entire allotment. If the final successful bid is $90 for 400 shares, the other bidders will only have to pay that amount for their shares even if they bid higher prices.

A Dutch auction also refers to an auction in which an item’s price is lowered until the item is bid upon. In this case, the first bid usually wins.

 

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