DEFINITION of 'Clearing Price'

Clearing price is the equilibrium monetary value of a traded security, asset or good. This price is determined by the bid-ask process of buyers and sellers, or more broadly, by the interaction of supply and demand forces.

BREAKING DOWN 'Clearing Price'

In any exchange, sellers want the highest price possible for a security or asset, while investors interested in buying it desire the lowest purchase price possible. At some point, a mutually agreeable price is reached between buyers and sellers. It is at this point that economists say the market has "cleared" and a transaction has taken place. Inherent in the bid-ask process is supply and demand of the securities or assets being traded. The clearing price of a security or asset will be the price at which it was most recently traded. In an actively traded market with many participants on both sides, price discovery can be quick, particularly when bid-ask quotes are constantly updated in real-time on an electronic exchange. Most securities are traded this way. It may take longer for more esoteric securities such as distressed debt to find a clearing price between a buyer and seller, as such assets are less liquid.

For products or services, the market clearing price is also determined primarily by the interplay of supply and demand. Basically, the intersection of the downward-sloping demand curve and upward-sloping supply curve represents the equilibrium price, or clearing price, for the product or service. Take a high-end smartphone, for example. If the manufacturer sets the price too high, then a surplus of its smartphones will develop; if it sets the price too low, then demand may leave the manufacturer short of inventory. In either case, assuming no friction in the market, an adjustment process between supply and demand will take place to find the clearing price for the smartphone — the manufacturer will lower the price if it is set too high or it will raise the price if it is set too low. Alternatively, the signals of demand could lead the manufacturer to decrease or increase production.

RELATED TERMS
  1. Price Tension

    Price tension occurs when there is a large difference between ...
  2. Inside Quote

    Inside quotes are the best bid and ask prices offered to buy ...
  3. Equilibrium Quantity

    Equilibrium quantity represents the amount of an item that is ...
  4. Clearing House

    Clearing houses are responsible for clearing and settling trades, ...
  5. Price Discovery

    Price discovery is the process of determining the price for a ...
  6. Competitive Equilibrium

    A competitive equilibrium is when profit-maximizing producers ...
Related Articles
  1. Insights

    Introduction to Supply and Demand

    Learn about one of the most fundamental concepts of economics - supply and demand - and how it relates to your daily purchases.
  2. Investing

    How To Calculate The Bid-Ask Spread

    It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions.
  3. Investing

    The Opening Cross: How Nasdaq Stock Prices Are Set

    Learn how the opening cross auction process determines prices of Nasdaq-listed securities at market open to ensure liquidity by matching buyers or sellers.
  4. Insights

    What is Supply & Demand?

    The law of supply and demand is one of the most basic principles in economics. In simplest terms, the law of supply and demand states that when an item is scarce, but many people want it, the ...
  5. Trading

    What Does a Clearing House Do?

    A clearing house is a third-party agency or separate entity that acts as a go-between for buyers and sellers in financial markets.
  6. Investing

    10 Tips for Getting a Fair Price on a Home

    When the housing market booms, it's tougher than ever to get a good price. Make sure the house you choose is worth the price you pay. Here are some tips on how to do that.
  7. Investing

    10 Essential Questions to Ask a Home Seller

    To get a sense of what the home you're considering buying is really like, it helps to talk to the seller.
  8. Insights

    How supply and demand affects inelastic goods

    Find out how the laws of supply and demand function for goods and services that are considered highly inelastic, including goods not yet discovered.
  9. Investing

    Housing deals that fall through

    Find why buyers back out, and what you can do if you're left holding the bag.
RELATED FAQS
  1. How Does the Law of Supply and Demand Affect Prices?

    Learn how the law of supply and demand affects prices, as when one outweighs the other, prices can rise or fall in response. Read Answer >>
  2. Is demand or supply more important to the economy?

    Learn more about the impact of supply and demand in an economy. Find out why companies study supply and demand as part of ... Read Answer >>
  3. What's the difference between regular supply and demand and aggregate supply and ...

    Understand how businesses use supply and demand and aggregate supply and demand to forecast economic activity. Learn about ... Read Answer >>
  4. What is general equilibrium theory in macroeconomics?

    Achieving equilibrium of prices in a single or multi-market setting involves a bidding process that is informed precisely ... Read Answer >>
  5. What types of stocks have a large difference between bid and ask prices?

    Find out which factors influence bid-ask spread width. Learn why some stocks have large spreads between bid and ask prices, ... Read Answer >>
Trading Center