A recent phenomenon, Penny Auctions, has taken the Web by storm. At these sites, you might be able to snatch up an iPod or Smartphone for only $10 or an HD TV for only $25. The lure of getting expensive new electronic equipment or other items for only pennies on the dollar is certainly exciting!

However, you can also spend a lot of money at these auctions without ever obtaining the items you desire. It’s smart to be knowledgeable about how these sites make their money and how you can obtain the best deals.

What is a penny auction?

Penny auctions are websites where you bid on popular electronics and other items in hopes of winning the bid for less than 10% of the item’s actual cost. New technological gadgets such as iPad 2s, HD televisions and iPhones are often up for bidding.

How do you get started at a penny auction site?

At most sites, the first thing you do is “join” by providing your contact information. Then, you purchase “bid tokens” for a certain price per token using a credit card or your PayPal account. Tokens are typically sold in packs of various amounts. For example, at Bigdeals, tokens are 75 cents each, so you could purchase a pack of 30 tokens for $22.50.

How do you submit a bid on a penny auction item?

Find an item you want to bid on and simply click on “bid.” You spend your tokens as you put in bids for the item, being mindful of the timer. It’s wise not to bid early as you paid for the bid tokens and are, in essence, giving away your money when you bid. Wait to see where the bid is going first.

If the bid goes higher than you want to spend and you haven’t bid yet, you haven’t lost any money. But if you bid too early and then get out of the bidding because the price goes too high, you won’t get your money back for the bids you put in (remember, you paid a certain amount of money per bid token in advance).

Some of the penny auction sites will add a few seconds on the clock toward the end of bidding, just to keep bids coming in and to encourage a “bidding war” at the last moments. Thus, it’s wise to decide in advance of bidding on an item how many of your bid tokens you’re willing to spend for the item.

Remember, if you don’t win the bidding, the money you spent for the bid tokens is gone and if you do win, you have to pay the final price and other charges (see next section) for the item.

What charges do you pay if you win the bid?

If you’re the last person to put in a bid when the timer runs out, you win the bid. This means you’re required to pay whatever the final auction price is plus shipping, handling and applicable sales taxes for the item. However, the final total amount you pay also includes what you spent for the bid tokens you used in the bidding process.

What precautions should one take regarding penny auctions?

Firstly, as with all websites, some penny auctions are more reputable than others. So, proceed with caution if you’ve decided to try your hand at a penny auction. Research any site you’re considering doing business with.

Consider that these websites are making very big money from “bid” dollars that can rack up to thousands on just one auction for a popular techno gadget. Keep in mind that each time you click the “bid” button you’re spending your hard-earned cash and may get nothing in return.

Many penny auction websites are set up for easy access. Watching how the clock timer ticks down as the bids come in provides good illustration of how the process works. On most sites, incoming bids add seconds to increase remaining bid time on the clock timer so the site brings in more dollars.

Ensure that you carefully read and understand all the instructions at the penny auction site you want to use. If you’re uncomfortable with any of the website’s info, move on to another site.

Summary

Take special care to read the website’s information and observe how the penny auction site works. Then, when you want to bid, decide how many bids you’re willing to “give” to bid for the item and wait until the clock timer runs down to preserve your dollars and bids until the end. Use good financial and budgeting savvy when dealing with penny auction sites.