What Is an Auction Market?

In an auction market, buyers enter competitive bids and sellers submit competitive offers at the same time. The price at which a stock trades represents the highest price that a buyer is willing to pay and the lowest price that a seller is willing to accept. Matching bids and offers are then paired together, and the orders are executed. The New York Stock Exchange (NYSE) is an example of an auction market.

Auction Market Process

The process involved in an auction market differs from the process in an over-the-counter (OTC) market. On the NYSE, for example, there are no direct negotiations between individual buyers and sellers, while negotiations occur in OTC trades. Most traditional auctions involve multiple potential buyers or bidders, but only a single seller, whereas auction markets for securities have multiple buyers and multiple sellers, all looking to make deals simultaneously.

Double Auction Markets

An auction market also known as a double auction market, allows buyers and sellers to submit prices they deem acceptable to a list. When a match between a buyer’s price and a seller’s asking price is found, the trade proceeds at that price. Trades without matches will not be executed.

Examples of the Auction Market Process

Imagine that four buyers want to buy a share of company XYZ and make the following bids: $10.00, $10.02, $10.03 and $10.06, respectively. Conversely, four sellers wish to sell shares of company XYZ, and these sellers submitted offers to sell their shares at the following prices: $10.06, $10.09, $10.12 and $10.13, respectively.

In this scenario, the individuals that made bids/offers for company XYZ at $10.06 will have their orders executed. All remaining orders will not immediately be executed, and the current price of company XYZ will be $10.06.

Treasury Auctions

The U.S. Treasury holds auctions to finance certain government financial activities. The Treasury auction is open to the public and various larger investment entities. These bids are submitted electronically and are divided into competing and noncompeting bids depending on the person or entity who places the recorded bid.

Noncompeting bids are addressed first because noncompetitive bidders are guaranteed to receive a predetermined amount of securities as a minimum and up to a maximum of $5 million. These are most commonly entered by individual investors or those representing small entities.

In competitive bidding, once the auction period closes, all of the incoming bids are reviewed to determine the winning price. Securities are sold to the competing bidders based on the amount listed within the bid. Once all of the securities have been sold, the remaining competing bidders will not receive any securities.

What is the Average Daily Balance Method?

The average daily balance is a common accounting method that calculates interest charges by considering the balance invested or owed at the end of each day of the billing period, rather than the balance invested or owed at the end of the week, month, or year.

Understanding the Average Daily Balance Method

The federal Truth-In-Lending-Act (TILA) requires lenders to disclose their method of calculating finance charges, as well as annual percentage rates (APR), fees, and other terms, in their terms and conditions statement. Providing these details makes it easier to compare different credit cards.

TILA permits the interest owed on credit card balances to be calculated in various different ways. The most common methods are:

• Average daily balance method: Uses the balance on each day of the billing cycle, rather than an average balance throughout the billing cycle, to calculate finance charges.
• Previous balance method: Interest charges are based on the amount owed at the beginning of the previous month’s billing cycle.
• Adjusted balance method: Bases finance charges on the amount(s) owed at the end of the current billing cycle after credits and payments have been posted.

How the Average Daily Balance Method Works

The average daily balance totals each day’s balance for the billing cycle and divides by the total number of days in the billing cycle. Then, the balance is multiplied by the monthly interest rate to assess the customer’s finance charge—dividing the cardholder’s APR by 12 calculates the monthly interest rate. However, if the lender or card issuer uses a method that compounds interest daily, the interest associated with the day’s ending balance gets added to the next day’s beginning balance. This will result in higher interest charges and the reader should confirm which method is being used.

The average daily balance credits a customer’s account from the day the credit card company receives a payment. To assess the balance due, the credit card issuer sums the beginning balance for each day in the billing period and subtracts any payments as they arrive and any credits made to the customer’s account that day.

Cash advances are usually included in the average daily balance. The total balance due may fluctuate daily because of payments and purchases.

Average Daily Balance Method Example

A credit card has a monthly interest rate of 1.5 percent, and the previous balance is $500. On the 15th day of a billing cycle, the credit card company receives and credits a customer’s payment of $300. On the 18th day, the customer makes a $100 purchase.

The average daily balance is ((14 x 500) + (3 x 200) + (13 x 300)) / 30 = (7,000 + 600 + 3,900) / 30 = 383.33. The bigger the payment a customer pays and the earlier in the billing cycle the customer makes a payment, the lower the finance charges assessed. The denominator, 30 in this example, will vary based on the number of days in the billing cycle for a given month.

Average Daily Balance Method Vs. Adjusted Balance Method Vs. Previous Balance Method

Interest charges using the average daily balance method should be lower than the previous balance method, which charges interest based on the amount of debt carried over from the previous billing cycle to the new billing cycle. On the other hand, the average daily balance method will likely incur higher interest charges than the adjusted balance method because the latter bases finance charges on the current billing period’s ending balance.

Card issuers use the adjusted balance method much less frequently than either the average daily balance method or the previous balance method.

Special Considerations

Some credit card companies previously used the double-cycle billing method, assessing a customer’s average daily balance over the last two billing cycles.

Double-cycle billing can add a significant amount of interest charges to customers whose average balance varies greatly from month to month. The Credit CARD Act of 2009 banned double-cycle billing on credit cards.

What Is an Appraisal?

An appraisal is a valuation of property, such as real estate, a business, collectible, or an antique, by the estimate of an authorized person. The authorized appraiser must have a designation from a regulatory body governing the jurisdiction of the appraiser. Appraisals are typically used for insurance and taxation purposes or to determine a possible selling price for an item or property.

Understanding Appraisals

Appraisals are used in many types of transactions, including real estate. If a home valuation, for example, comes in below the amount of the purchase price, mortgage lenders are likely to decline to fund the deal. Unless the prospective buyer is willing and able to come up with the difference between the appraised value and the lender’s financing offer, the transaction will not go forward.

The appraiser can use any number of valuation methods to determine the appropriate value of an item or property, including comparing the current market value of similar properties or objects.

Appraisals are also done for tax purposes when determining the value of charitable donations for itemized deductions. Deductions can reduce your taxes owed to the IRS by deducting the value of your donation from your taxable income.

Appraisals can also be a helpful tool in resolving conflicts between heirs to an estate by establishing the value of the real estate or personal property to be divided.

Types of Appraisals

Home Appraisals

A home valuation is necessary during the process of buying and selling a home, as well as a refinance of an existing mortgage. A refinance is when a loan or mortgage is reevaluated and updated to current interest rates and new terms.

An appraisal determines the home’s value to ensure that the price reflects the home’s condition, age, location, and features such as the number of bathrooms. Also, valuations help banks and lenders avoid loaning more money to the borrower than the house is worth.

In the event of default, when the borrower can’t make the payments anymore, the bank uses the appraisal as a valuation of the home. If the home is in foreclosure, whereby the bank takes possession of the house, it must be resold to help the lender recoup any losses from making the mortgage loan.

It’s important to remember that when a bank lends for a mortgage, it gives the full amount of the home’s value to the seller on the date it’s sold. In other words, the bank is out the money and, in return, has a promise to pay, plus interest, from the borrower. As a result, the valuation is important to the lending process since it helps the bank avoid losses and protect itself against lending more than it might be able to recover if the borrower defaults.

Collectibles or Antiques

Professional appraisals can be done for many items, including collectibles, antiques, or grandma’s silver. Ideally, you’ll want multiple valuations for an item from an accredited professional. Appraisers might charge an hourly rate or a flat fee. 

A certified appraiser’s valuation will likely be fair and unbiased, whereas the local collectible shop has an incentive to offer you less for the item. Also, owners can get an idea of an item’s value by checking collectible magazines and online appraisal websites. Most websites charge a small fee, such as $10, to value an item. Of course, obtaining a value online is done through photos of the item and is not an official valuation, but it should give you an idea of what it’s worth before proceeding. If you decide to pursue an appraisal, the American Society of Appraisers has thousands of members and is a great place to begin searching for an accredited professional.

Appraisals and Insurance

Some types of insurance policies also require appraisals of goods being insured. Homeowners’ and renters’ insurance policies protect policyholders against the loss of personal property due to theft or damage. These blanket policies cover items up to a preset dollar limit. Obtaining an appraisal of the contents of a home creates an inventory of the owner’s property and establishes its value, which helps to ensure a swift settlement if a claim is filed.

When the value of specific items exceeds a homeowners policy limit, the policyholder may wish to obtain additional insurance that covers luxury items such as jewelry or collectibles, including art objects and antiques. Before issuing personal property insurance policies for high-end items, many insurance underwriters require applicants to have the object appraised. The appraisal creates a record of the item’s existence, along with its description. It also helps establish the item’s actual value.

Some insurance contracts include an appraisal clause that specifies the owner agrees to obtain an appraisal from a mutually agreeable expert in the event of a dispute between the owner and the insurance company. Neutral appraisals can speed the resolution of a settlement and keep disputes from escalating into lengthy and expensive lawsuits.

Home Appraisal Process and Cost

The home appraisal process typically begins after a buyer makes an offer on a home and that offer is accepted by the seller. The buyer’s mortgage lender or broker may order the appraisal on their behalf, though the buyer is typically expected to pay for it out of pocket. On average, a home appraisal for a single-family property runs between $300 and $450 while appraisals for multi-family homes can start at around $500.

Once the appraisal is ordered, the appraiser will schedule a time to visit the property. The appraiser will then conduct a thorough review of the interior and exterior of the home to determine what it’s worth. This may require them to take measurements or photos of the property. Appraisals can take a few minutes to a few hours to complete, depending on the details of the home and the appraiser’s methods.

After visiting the home, the appraiser will use the information they’ve collected to create a reasonable estimate for the home’s value. At this stage, the appraiser will also look at the values of comparable homes in the area. Using these comps and what they’ve learned from visiting the home, the appraiser will prepare an appraisal report that includes a figure that represents their perceived value of the home.

A copy of this appraisal report is then shared with the buyer and the buyer’s mortgage lender. It can take anywhere from a week to 10 days for the report to be completed. Sellers can also request a copy of the report.

If a buyer disagrees with the appraisal report, they can request a reconsideration from the lender or opt to pay for a second appraisal.

How To Improve Your Home’s Appraisal Value

The appraisal process is meant to be objective, but appraisers are human. Good curb appeal and clean, uncluttered rooms send a message of a well-maintained home. And they can be achieved without a great deal of time or expense. There are some easy ways to quickly improve the appraised value of your home:

• Lean and uncluttered rooms convey the message that a home is well-maintained.
• Minor cosmetic improvements can make a big difference.
• Point out any major improvements you’ve made to the appraiser, in case they miss them.

On the other hand, you should avoid big expensive improvements just for the sake of increasing your home’s appraisal value. They generally don’t pay off.

Make sure you know your rights as well. If you hire the appraiser to determine your home’s value, the appraisal belongs to you. If you’re refinancing your mortgage and the lender hires the appraiser, the lender is required to provide you with a copy–possibly for a reasonable fee–of the appraisal and any other home value estimates.

If you think the appraiser has the value wrong, first review the written appraisal for errors. Check whether the comps the appraiser chose are reasonably similar to your home. If you still think the price is incorrect, you can appeal the valuation with your lender or ask it to order a second appraisal. 

The Bottom Line

An appraisal is an assessment of the fair market value of a property, business, antique, or even a collectible. Appraisals are used to estimate the value of items that are infrequently traded, and are often rare or unique. The authorized appraiser must have a designation from a regulatory body governing the jurisdiction of the appraiser. Appraisals can be done for many reasons such as tax purposes when valuing charitable donations, but the most familiar form of appraisal is for a property.

Home appraisals can positively or negatively impact the sale of a house or property, and so are an important part of the process of financing a house. A home appraisal is almost always a requirement when purchasing a home with a mortgage, for example, and if you are refinancing your property your lender may hire their own appraiser to make a valuation of your home.

What Is Asset Allocation?

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon. The three main asset classes—equities, fixed-income, and cash and equivalents—have different levels of risk and return, so each will behave differently over time.

Why Asset Allocation Is Important

There is no simple formula that can find the right asset allocation for every individual. However, the consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, the selection of individual securities is secondary to the way that assets are allocated in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.

Investors may use different asset allocations for different objectives. Someone who is saving for a new car in the next year, for example, might invest their car savings fund in a very conservative mix of cash, certificates of deposit (CDs), and short-term bonds. An individual who is saving for retirement that may be decades away typically invests the majority of their individual retirement account (IRA) in stocks, since they have a lot of time to ride out the market’s short-term fluctuations. Risk tolerance plays a key factor as well. Someone who is uncomfortable investing in stocks may put their money in a more conservative allocation despite a long-term investment horizon.

Age-Based Asset Allocation

In general, stocks are recommended for holding periods of five years or longer. Cash and money market accounts are appropriate for objectives less than a year away. Bonds fall somewhere in between. In the past, financial advisors have recommended subtracting an investor’s age from 100 to determine what percentage should be invested in stocks. For example, a 40-year-old would be 60% invested in stocks. Variations of the rule recommend subtracting age from 110 or 120, given that the average life expectancy continues to grow. As individuals approach retirement age, portfolios should generally move to a more conservative asset allocation to help protect assets.

Achieving Asset Allocation Through Life-Cycle Funds

Asset-allocation mutual funds, also known as life-cycle, or target-date, funds, are an attempt to provide investors with portfolio structures that address an investor’s age, risk appetite, and investment objectives with an appropriate apportionment of asset classes. However, critics of this approach point out that arriving at a standardized solution for allocating portfolio assets is problematic because individual investors require individual solutions.

The Vanguard Target Retirement 2030 Fund would be an example of a target-date fund. These funds gradually reduce the risk in their portfolios as they near the target date, cutting riskier stocks and adding safer bonds in order to preserve the nest egg. The Vanguard 2030 fund, set up for people expecting to retire between 2028 and 2032, had a 65% stock/35% bond allocation as of Jan. 31, 2022. As 2030 approaches, the fund will gradually shift to a more conservative mix, reflecting the individual’s need for more capital preservation and less risk.

Bottom Line

Most financial professionals will tell you that asset allocation is one of the most important decisions that investors make. In other words, the selection of individual securities is secondary to the way that assets are allocated in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.