INDUSTRY INSIGHT
Young Investors
SPONSORED CONTENT
Learning the Difference between
W
PRICE AND an Auction
VALUE:
Take Your Child to
ith the popularity of
television entertainment
such as Pawn Stars, Antiques
Roadshow and American Pickers, there
is ample opportunity to observe the
difference between establishing a value
and the price someone is willing to
pay for an item. The value of what may
be considered a “collectible” (either
through sentiment or fad) may not be
substantiated by its price.
With summer in our midst, why not
take the opportunity to turn off the
television, get outside, and experience
this phenomenon first hand? There is
no better place to learn the difference
than by participating at an auction!
If you are unfamiliar with
locating auctions, they are
usually listed in the classified
sections of your local
newspaper. From personal
experience, I know there is a
great one at the Auction Barn
in Cranberry Township on
Friday evenings.
Once you arrive at a
live auction, get ready
to participate. You must
register so you can get a
bidder’s number (without
this number, you will not be
allowed to bid.) Then you
(and everyone else) have
the opportunity to preview
and inspect the items for sale
prior to bidding. This is the
time when everyone determines what they would like to buy and what
value they place on the item.
Then, the game begins! There is usually a minimum ask price that
the auctioneer uses to begin the sale of an item. Each bidder raises
their bidder’s number if they want the item and are willing to pay the
price then quoted by the auctioneer. The bidding war continues as the
auctioneer keeps increasing the price of the item until all bidders drop
out but one. These bidders usually drop out because the asking price
of the item increases to an amount that is more than the value they had
previously determined. The winning bidder is the one who is willing to
pay the highest price for the item. The item is sold once the auctioneer
accepts the final bid (market value).
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For example, if your child sees a
toy car at an auction and decides it
is worth $5 (and you agree), then he
would be willing to pay up to $5 for it.
If the bidding starts at $1 and reaches
a final bid price of $3, it doesn’t mean
your child would now value the car at
$3, but it does make it likely that he
is the one making the winning bid.
With the final bid price of $3, it would
be worth buying the toy car at that
price, since it is below the value your
child determined. Just hope that there
isn’t another child at the auction that
wants the car and values it at $6. The
outcome could be much different.
Here are some of the fundamental
lessons from attending an auction:
1. Understanding that price and value
are not always one and the same.
2. Practice Discipline - Set a limit on how much you are willing to
pay for any item, and stick
to it.
3. Understanding “Supply
versus Demand” - The
number of available items
for sale and the number
of interested bidders
in attendance make a
difference on an item’s
price.
4. Help your children
to understand how to
structure their spending
so that they determine
a maximum dollar amount that they are willing to pay for
something they want.
Attending an auction will provide you and your child a great
example of where price and value are not necessarily one and the same.
(And for those interested in teaching their children about investing,
there is no better place to learn about how the stock market works than
by participating at an auction!)
This Industry Insight was written by Kathy Baum, ChFC®.
Regional Client Service Manager, Muhlenkamp & Company,
Inc.
Kathy Baum joined Muhlenkamp & Company in
September 2007. She and her family reside in Mars.