In this article, We learn about "Clearing Price ".Let's Go!
" Clearing Price " is the price at which a security trades when supply and demand for that security match in the market.
In other words, the price at which quantity supplied equals quantity demanded, thus "clearing the market."
The concept of clearing price is crucial to understanding how market prices are determined. Basic economic principles from Supply and Demand:
- If supply exceeds demand at a specific price (oversupply), the price will fall until the market clears.
- Conversely, if quantity demanded exceeds quantity supplied at a specific price (excess demand), the price will rise until the market clears.
Clearing prices are particularly important in auctions, including those that occur in securities transactions.
For example, in an initial public offering (IPO) or Treasury auction, securities are sold to the highest bidder until all of the securities on offer have been sold. The lowest price at which all securities can be sold is the liquidation price.
In commodity markets and stock exchanges, clearing prices are determined by complex algorithms that match buy and sell orders to find the price at which the commodity or security has the highest trading volume.
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