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What is an Auction?

Mary McMahon
Updated May 16, 2024
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An auction is an event in which goods or property are sold to the highest bidder. By being open to the public, an auction ensures a wide range of bids, and sometimes items at auction can fetch surprisingly high prices. The bidders, in turn, create their own market, determining on an individual basis how much they want to pay for an item, rather than having prices dictated by the seller. There are a number of types of auctions performed around the world.

In a basic so-called English auction, an item is introduced to the crowd and members of the public bid on it, slowly raising the price until everyone bows out, leaving a winner of the auction who pays the price he or she bid. The auction is managed by an auctioneer, someone who keeps an eye on the bidding and determines the ultimate winner. In some cases, the seller may set a minimum bid, ensuring that the item will not sell below a certain price. Famous auction houses like Sotheby's specialize in this type of auction.

In another type of auction, a Dutch auction, the auctioneer starts at a set price and then lowers it. Members of the crowd bid then they hear prices that they like. Dutch auctions may also be used to sell multiple units of the same item to a big crowd; for example, someone selling off lots of hay might allow all members of the crowd to pay the same price, once a fair bid has been reached.

In some cases, people at an auction may submit sealed bids which are opened simultaneously. The winner of the auction is the person with the highest bid. In another variation on the basic auction, the silent auction, people wander around a room looking at items, and they write their bids on accompanying sheets of paper. Participants can see other people's bids, and they may choose to try to counter another person's bid if they particularly want the item in question. At the end of a set period, the person with the highest bid is named the winner.

At most auctions, people can bid remotely by giving the auctioneer a letter indicating their intent to bid and the maximum amount which they are willing to bid. Some auction houses specifically cater to this, keeping a number of people on staff who stay on the phone with customers during auctions, bidding as proxies for their clients. In other cases, an auction may be carried out entirely remotely, as is the case with online auctions.

Generally, a bid is considered legally binding. By bidding, a participant agrees to pay the amount which he or she bids. In high-profile auctions, bidders may be asked to deposit money in escrow accounts, or to provide other proofs that they are capable of paying for the items they bid on.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By AuctionTay — On Nov 15, 2010

I am a retailer who owns a retail shop. I have a marketing idea where i will attract customers to my shop by arranging few auction slots in a day (on weekend) for anyone (customers or potential customers) to participate auction of some of my products with a starting price (reserve price). Can anyone tell me is it legal to do this? do i need a license? If necessary, where (which authority) can i apply this license?

By BrickBack — On Oct 22, 2010

Mutsy-The auction site I am most familiar with is REDC. They are a real estate auction house that specializes in bank owned home auctions.

The good thing about these auctions is that these homes all have a clear title, unlike the auctions that are offered at the courthouse steps which usually don’t.

So when you bid on theses home there will be no liens on the property. However, you do have to inspect the property because these homes are sold as is.

It is also a good idea to get prequalified for a mortgage before you go. The reason is simple. This way you can compare the offer that you bank gave you to the offer that the lender at the auction will give you.

Also remember that not all properties will offer financing and these properties are listed as cash only.

They usually have foundation or structural issues that prevent financing. With these properties you will either have to have the cash or a home equity line of credit to cover the purchase which many investors do.

By mutsy — On Oct 22, 2010

Suntan12-A government car auction is a like a repo auction in that the auction cars were taken away from the original owners.

In a government auction the items were taken away for legal reasons such as failure to pay taxes, or because they items were purchased in an illegal fashion such as with money laundering or fraud.

For example, the case of infamous swindler Bernie Madoff, there was a government auction to liquidate his entire estate in which he built by running a scheme against his own investors.

The proceeds from these auctions are used to pay back the victims. These auctions offered lavish homes, boats, jewelry, art and anything that you can image.

By suntan12 — On Oct 22, 2010

Sunny27-An auction house will prepare a set of goods for auction on a given day. There are usually brochures printed out of the material or an opportunity for the bidders to view the auctioned off items ahead of time so that they can get an idea of what items they would like to bid on.

For example, many cruise ships offer art auctions for its passengers. There is a catalog along with a viewing date where all of the passengers get to see the paintings that they would like to bid on. The auction house does this so that the bidders are prepared to bid and he auction runs smoothly.

By Sunny27 — On Oct 22, 2010

Anon26372- There was a secondhand book store near my house that bought books from you and also sold older books, but it went out of business.

These types of businesses have difficulty sustaining a storefront presence. They are better as online businesses in which they just sell used books and buy their books through other channels like Ebay.

By anon26372 — On Feb 12, 2009

which bookstores buy secondhand and older edition books

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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