Price discovery - Financial definition

Price discovery is a fundamental concept in financial markets, where buyers and sellers interact to determine the equilibrium price of an asset. This process involves the aggregation of information, expectations, and preferences of market participants, leading to the establishment of a price that reflects the underlying fundamentals and market sentiment. Price discovery mechanisms vary across different markets and asset classes, but common methods include auction-based systems, continuous trading platforms, and over-the-counter transactions.

For example, in stock markets, price discovery occurs through the continuous matching of buy and sell orders on electronic exchanges, while in commodities markets, prices may be determined through periodic auctions or negotiated transactions between buyers and sellers. Price discovery is essential for efficient capital allocation, risk management, and investment decision-making, as it provides investors with valuable information about asset valuations and market trends.