What Does Bidding Up Securities Mean?

Bidding up is the act of increasing the price an investor is willing to pay for a security. Bidding up is most commonly associated with investors who use limit orders and is likely to be used when the price of a security in the market is increasing.

Understanding Bidding Up Securities

Bidding up keeps investors from being priced out of trades. When an investor places a buy limit order at a specified price, that investor is saying that he or she is not willing to pay any more than the price limit for a share. This strategy works in relatively calm markets. If the price of a stock is rapidly increasing, sellers are less likely to be willing to sell shares at the limit price if they can fetch more from other buyers. By increasing the bidding price, a buyer decreases the odds that the order will go unexecuted.

While the buyer may use a bidding-up strategy to improve order execution, he or she may inadvertently be contributing to increasing the share price. While it is unlikely that a single investor increasing limit order prices will put significant upward pressure on price, if enough investors follow a similar strategy, they may have an effect.

Examples

Investors bid up when they are confident and expect a stock to continue to rise. Prior to Donald Trump’s inauguration, investors were bidding up the stock market on bank and materials stocks. This was likely because historically, financials and materials have been the best-performing sectors during the first 100 days of a presidency, dating back to Ronald Reagan.

Bidding up can have a negative effect, for example with the dotcom bubble in the early 2000s and the housing bubble in the mid-2000s. Fueled by emotion and market momentum, buyers overinvested and bid up prices of technology and real estate stocks. Once prices were too high to be sustainable, investors inevitably panicked and rushed to sell, causing a market crash.