Question

) Regarding an IPO, please explain how a “Dutch auction” works and provide an example for it. What is the main advantage of it – and imagine a reason why it is still not used that often

Answer 1

It is a method for pricing shares in an IPO whereby the price of the shares offered is lowered until there are enough bids to sell all shares. All the shares are then sold at that price.

It gives the price that finds a perfect balance between supply and demand

Imagine company wants to sell 100 shares The auctioneer begins by calling out a high price per share that will no bids. He then calls out lower and lowers prices until someone decides to buy eight shares The auctioneer continues to lower the price until someone agrees to buy more shares (12, for example).  Continues to lower the price until all 100 shares are spoken for. At auction’s end, bidders get the number of shares they agreed to buy, but at the price bid by the last bidder. If the first guy bid $100 per share for the eight shares, and the second guy bid $75 per share for the 12 shares, they only pay what the last guy bid–$50 per share.

The Dutch auction model–which promises more money up front.On the other hand, there two reasons why the traditional model may be superior in the long run. The price spike associated with a traditional IPO reflect success to the stock, which take stock higher.

.Another advantage of selling IPO shares at a discount to wealthy individuals and large institutions is that these investors tend to hold assets for long periods, thereby decreasing chances the stock will tank if the firm has a average quarter.