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 the 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 updated continuously 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. 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.