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.

Key Takeaways

  • Bidding up is the act of increasing the price an investor is willing to pay for a security.
  • The phenomenon of bidding up securities often happens when investors use limit orders in a rising market.
  • Because sellers are unwilling to accept limit price and hold out for a better price, buyers who use limit orders inadvertently put upward pressure on the price.

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 they are 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, they 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.

Example of Bidding Up Securities

Investors bid up when they are confident and expect a stock to continue to rise. Prior to the inauguration of President Donald Trump in January 2017, investors bid up the stock market in the expectation of favorable economic, tax and trade policies.

Bidding up can have a negative effect, for example with the dotcom bubble in early 2000 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.