How does auction theory impact in your investment. Do you take interest in share market and want to invest in share market, and then i am going to tell you about auction theory and how does auction market theory helps you to invest your money in the right one. In an auction market, buyers enter competitive bids, and sellers submit their competitive offers at the same time to the buyers. The price in which a stock trades represents the highest price that a buyer is interested to pay and the lowest price that a seller is willing to accept. Matching bids and offers are then paired together, and the orders are executed. The New York Stock Exchange (NYSE) is one of the examples of an auction market. So friends read this article to the last point and i am sure you will get enough idea about the auction market theory and it will help you to invest your money too. What is auction market theory? The auction market theory is basically based upon ‘fair value’. All free markets seek fair value and is determined by one of the pillars of economic theory: supply and demand. Fair value is the balance between what some person is interested to pay and what price another person is interested to sell. It is actually the price at which both buyers and sellers agree. Markets are complex and what takes price up or down depends on the constant shifting of market price or just a fundamental change in market conditions. These conditions move price in a seemingly random rhythm between trending price moves and consolidating sideways markets. It's our job as a trader to understand how these prices are moving ups and downs. At the very least profit some inefficiency in the market, through probabilities and good risk management. Balanced Market When markets price becomes stronger or in a bounded range, then according to auction market theory the market is balanced. In a balanced market sentiment is moving around fair value. Price trades within a bounded range where the volume traded or time spent within this range is normally distributed. Unbalanced Market When markets trends, according as the auction market theory the market is unbalanced. In an unbalanced market, price is ‘seeking’ to find fair value. Price making a move significantly in one direction until it reaches its state of balance once again. The market will then range sideways. In
trending markets volume is slightly distributed over the trending area and prices moves rapidly through these areas. Fair Value Let's discuss the auction market theory in details taking petrol as an example. Suppose petrol is currently valued at 71/liter. We know that buyers are motivated to get a good deal on how much they pay for petrol at the pump. While the petrol retailer wants to get as much per liter of petrol as they can. Sellers want to get the most they can and the buyers want to pay the least. Now, let's say petrol prices go up to 80/liter? At such high levels buyers will not be interested to pay these high prices. At these high levels consumers may decide to hold off on filling their tanks. They might even choose to not drive their vehicles so often. On the other hand, petrol retailers are keen to sell as much petrol as possible at these prices. At these high prices and the combination of less interested buyers and more aggressive sellers, creates a situation of unfair pricing. As a result the market again reverse back to 71/liter. If for example a same kind of situation occurs but in reverse i.e. petrol prices drop to say 62/liter. The same case would apply. Price would finally reverse back to trading closer to 71/liter. This is what we called a fair value in auction market theory. So as you read about the auction market and about balanced and unbalanced market and at last you got to know about the fair value in auction market theory and these points are enough to make a decision where and why to invest your money on the basis of auction market theory. I hope i have solved all your problems related to this auction market theory and you loved this very much, if you want to know about anything else then please do drop your comment in the comment box.