For many, there has always been a degree of mystique surrounding auctions and auction houses, specifically with their time-honored procedures and customs. But as art, in particular, continues to rise in popularity as investments, more people are becoming interested in all-things auctions, including how bids work.
To help, here is a deep dive into auctions, auction houses, and bids.
Auctions are sales events during which, during an open or closed format, prospective buyers bid competitively on goods or services.
If the auction is an open format, all bidders are aware of all submitted bids. The item or service being bid on is sold to the auction participant that places the highest bid. The bidding is done at a physical or online location. Participants are all aware, in real time, of competing bids, and may continue to raise their bids until they either win the auction or drop out. “Winning” the auction usually means submitting the last-highest bid within the auction time limit.
With a closed format, bidders are unaware of other bids. It is common, for example, for business transactions such as the sale of a company or its assets to be conducted in a closed format. During such auctions, the seller receives sealed bids from interested parties, the amounts of which are only known by the seller. The seller may opt for a single bidding round or may choose multiple bidders for another round.
Note that price is not the sole factor when a company or division is on the market. For example, the seller may wish to salvage as many positions as possible for their employees. If a bidder can offer the best terms in that regard, they may be chosen — even if they do not submit the highest price.
Examples of auctions include those presented by prominent art houses Christie’s, based in London, and Sotheby’s, which has 80 locations in 40 countries. There is no end to assets that may appear at auction. Other common examples include vehicle auctions or livestock markets.
There are also government auctions, in which investors can participate in auctions of government-owned properties that were either bought through normal means or foreclosed upon.
For example, say a furniture manufacturer files for bankruptcy and owes back taxes. Its capital equipment, including tools, vehicles, equipment, machinery, and real estate, may be seized by the government, and sold at auction to other manufacturers. Such auctions are popular as companies in the same markets can buy used equipment cheaper.
Houses are also commonly bought at auction. They end up there due either to foreclosure — the owner failed to make mortgage payments for at least a few months — or tax defaults. With the former, the mortgage lender can put the home up for auction and force out the homeowner.
Likewise, a house may wind up being auctioned if the homeowner fails to pay the assessed property taxes. Here, it is the unpaid tax authority, rather than the bank, which seizes the property. The auction is then conducted by the local or county tax authority’s comptroller’s office, or by a local sheriff or clerk.
Home auctions may be found through local real estate agents, governments, and a number of online sites, and are typically offered at discount.
Then there are silent auctions, in which assets that are for sale are exhibited so that attendees can select, bid on, and buy them. Such auctions do not use auctioneers. Instead, participants silently and anonymously bid on a bid sheet using a designated bidding number.
On eBay, where individuals can list goods for sale, some sellers offer a “buy it now” feature that permits individuals to immediately purchase and pay for an item. In other listings, the highest bidder gets the item. If an asset is at auction, the seller establishes a starting price and interested parties can bid against each other.
With a sealed first-price auction, each participant submits sealed bids and the bidder who makes the highest offer wins. This type of auction is seen as restrictive since each bidder may only submit one bid.
Overall, the most common form of auction is the “open” English auction, in which participants openly bid against each other, either by electronically submitting their bids or by shouting out their bid amounts. The auction is over when none of the participants is willing to top the most recent bid, rendering the highest bidder the winner.
Some may have noticed that when Google (now Alphabet) issued its initial public offering in 2004, it used a traditional auction variant called a Dutch auction. With this auction type, interested buyers submit bids that include the number of shares sought in addition to the amount they are open to paying for the shares.
After the Google auction, the underwriters poured through the bids to establish the minimum acceptable bid, and the IPO was priced at $85 per share.
In addition, a Dutch auction refers to a rarer auction type in which an asset’s price is reduced until there is a bid. Assuming that the price exceeds the reserve price, the first bid tendered is the winning bid. This is different from traditional auctions, in which the price goes up as bidders compete.
An auction house facilitates the purchasing and selling of assets, such as artworks and collectibles. The term may also refer to the building or facility in which an auction takes place.
Historically, auctions go way back, used both to sell the assets of those who wish to get rid of them, and to liquidate debtors’ assets. The Stockholms Auktionsverk in Stockholm, Sweden, founded in 1674, is believed to be the oldest auction house.
It was common for auctions to be held in open-air public spaces. In fact, enclosed auction houses did not exist until the 17th century.
Christie’s and Sotheby’s have been mentioned as being among the most well-known auction houses. They nearly exclusively deal with top-shelf art and collectibles.
A bid is an offer an individual or company makes to buy an asset. Such bids are commonly made at auctions and markets including the stock market. They also may be made by companies competing for project contracts. Ultimately, when a bid is made, the amount of the bid telegraphs how much the person or business is willing to pay for an asset.
The term “bid” can also refer to the price a market maker — a person or business who actively quotes two-sides markets in a certain security — is willing to purchase a security. Note that market makers, unlike retail purchasers, must also show an ask price.
The bid process generally hinges on the market the assets are sold through. For instance, investors may make bids through brokers for stocks or other securities, while bids made at auction may be made online or in person.
If companies are vying for contract jobs, the bidding process will involve mailing packages to interested parties. Such projects may be governmental or offered by industries such as healthcare, information technology, education, public safety, or social services.
When many people think of auctions, however, they think of art. Before bidding on art, it is recommended that interested parties arrive at the auction early to see the art, peruse the information in the catalogue, and ask any questions. Online registration is usually required 24 hours before the event.
Auction participants should bring their financial credentials and, depending upon the price of the work in which you’re interested, a bank letter of reference. Bidding with a credit card is also possible; it is usually necessary when bidding online.
The global art market in 2021 hit a whopping $65 billion in aggregate sales, an increase of 29 percent over the prior year. The news came as little surprise, as art as an investment is increasingly popular, and for good reason: art is not directly correlated with stock market performance, meaning that such investments can provide stability during economic uncertainty, including periods of inflation.
These days, investors who seek to add art to their holdings have more choices than ever, largely owing to the Internet and improved transparency, including art equity funds. There are non-fungible tokens and fractional shares, for example, in traditional ownership.
Interested investors may also go through Yieldstreet, the leading alternative investment platform on which nearly $4 billion has been invested to date. With the broadest variety of alternative asset classes available, Yieldstreet has highly vetted offerings in real estate, structured notes, private equity, venture capital, legal finance and more.
The platform also includes art as an “alternative” to stock market volatility. Its art equity funds offer fractional art ownership of a diversified pool of works by emerging, mid-career, and blue-chip artists with a single investment. Entry is as low as $10,000, with net annualized returns of 12.2 percent. Further, the utilization of third-party appraisals and expertise, complemented by a proprietary database, removes the guesswork from art investments.
In addition to the potential for steady returns, putting capital in art can also help to reduce overall risk through diversification – the process of building a portfolio of asset classes and expected performances that vary. In fact, diversification is a fundamental element of long-term investing success.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.
Once the exclusive province of institutions and the ultra-wealthy, art is more accessible than ever, and is ever popular due to its low correlation to volatile public markets. Beyond going through auction houses and buying physical artworks, there are other ways to invest in art that does not require market expertise, but which can offer steady pass
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.