What is a 'Competitive Bid'

A competitive bid is a price submitted to a soliciting firm for products or services. A vendor or service provider submitting a competitive bid wants to win a contract.

BREAKING DOWN 'Competitive Bid'

When a company, organization or government agency needs goods on a large scale or long-term critical services, it typically puts out a solicitation in the form of a request for proposal (RFP). It could be for a significant quantity of raw materials, an IT project, an infrastructure project, management of a pension fund, etc. Interested parties will come back with their competitive bids. The lowest price bid may not necessarily win a contract, as the purchaser must have confidence in the capabilities of the vendor or service provider to execute the order.

Example of a Competitive Bid on Wall Street

A competitive bid is a step in the initial public offering process whereby an underwriter submits a sealed bid to a company that is making its first issue of stock. After collecting competitive bids from several underwriters, the issuer awards the contract to the underwriter with the best price and contract terms. Competitive bidding is considerably less common than negotiated bidding, the other main method by which issuing companies contract with underwriters. Competitive bidding is more common with municipal bonds.

Underwriting is a crucial step in the IPO process. Underwriters are usually investment banks, and they are responsible for selling the stock of the company that is going public. A firm is more likely to use a negotiated bidding process in selecting an underwriter because it wants to work with a familiar firm (such as the one that managed its venture capital financing) or a firm that has an excellent reputation. In fact, it's common to use several underwriters, called a syndicate, which share the risk of selling the IPO shares.

RELATED TERMS
  1. Bid Rigging

    Bid rigging is an illegal practice in which competing parties ...
  2. Best Bid

    Best bid is the highest quoted bid for a particular security ...
  3. Maturity by Maturity Bidding - ...

    A bond auction that allows bidders (who are underwriters) to ...
  4. Hit The Bid

    Hit the bid is a buzzword used to describe an event where a broker ...
  5. Bid Bond

    A bid bond is a debt secured by a bidder for a construction job, ...
  6. Underwriting Fees

    Underwriting fees are monies collected by underwriters for underwriting ...
Related Articles
  1. Insurance

    What is Underwriting?

    Underwriting is a term most often used in investment banking, insurance and commercial banking. Generally, underwriting means receiving a remuneration for the willingness to pay for or incur ...
  2. Small Business

    What are antitrust laws?

    Learn about antitrust laws or "competition laws." These statutes protect consumers from predatory business practices by ensuring fair competition exists.
  3. Investing

    The Road To Creating An IPO

    Through an Initial Public Offering, or IPO, a company raises capital by issuing shares of stock, or equity in a public market. Generally, this refers to when a company issues stock for the first ...
  4. Insurance

    What Prequalification and Underwriting Do

    Learn now prequalification and underwriting can help you buy the policy that best meets your needs.
  5. Small Business

    Risks Associated With Government Contracts

    Government contracts can be rewarding, but they also come with a variety of risks.
  6. Investing

    Comcast Formalizes $30.7 Billion Bid for Sky

    Comcast has ignited a bidding war for Sky by putting pressure on Fox and Disney to ante up.
  7. Investing

    Municipal bond tips for the Series 7 exam

    Learn to distinguish between general obligation and revenue bonds to ace the municipal bonds portion of the Series 7 exam.
  8. Trading

    The Basics of the Bid-Ask Spread

    The bid-ask spread is the difference between the bid priceĀ and ask priceĀ prices for a particular security.
  9. Trading

    Greenshoe Options: An IPO's Best Friend

    Find out how companies can boost their initial public offering price with these little-known options.
RELATED FAQS
  1. Do underwriters make guarantees to sell an entire IPO issue?

    Underwriters represent the group of representatives from an investment bank whose main responsibility is to complete the ... Read Answer >>
  2. What does the underwriter do in a new stock offering?

    Learn the role an underwriter plays for an initial public offering, and the steps an underwriter takes in preparing for an ... Read Answer >>
  3. How do I become an underwriter?

    Learn about the education, training and certification required to become an insurance underwriter and the important qualities ... Read Answer >>
  4. What are examples of risks for all underwriter types?

    Learn about the risks faced by different types of underwriting activity. Explore specific examples of risks faced by insurance ... Read Answer >>
  5. Why are the bid prices of T-bills higher than the ask prices? Aren't bids supposed ...

    Yes, you are correct that the ask price of a security should typically be higher than the bid price. This is because people ... Read Answer >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center