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What is Price Discovery

18 Sep 2023

Introduction

Earning profits in the stock market can widely be determined as getting a deal for a fair price. However, choosing the price of a trading instrument takes work in this volatile market. But there's a process called price discovery, which is mostly found as the best way to determine the price. So, knowing about it is necessary for a trader. After reading this blog, you will also be able to understand the price discovery. So let's get started.

What is Price Discovery?

Price discovery is a process that helps to get the price where a trade can be executed mainly based on the demand and supply. However, there are multiple factors for price discovery. Basically, it deals with price discovery, where both buyer and seller agree on the trade.

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The price discovery is important to determine a stock's resistance and support line. A resistance line is drawn at a price point from where a stock falls. Similarly, a support line is where a store gets support to start rising. Since these two are imaginary, determining them mainly depends on the price discovery.

How does Price Discovery Work?

In economics, there are two terms called demand and supply. If you draw a graph for demand and supply, you will find that the demand rises when inadequate. So, demand and supply are two important factors that even many luxury companies used to keep their prices high.

Price discovery determines these two factors to get a price that should be paid for a stock. Since it is not a predefined process, it depends on many factors like market sentiments, demand, supply, transaction price, etc.

Let's say you go to a market to buy tomatoes. You ask a seller for one kilogram of tomatoes. The seller packs your order and asks for ₹120. Now, you may pay this price or may not. You may ask other sellers for the price or try to know if there's a shortage. If you find the price fair as there's a shortage, you will pay the price.

This agreement based on demand and supply is called price discovery. But this time, too, you'll analyse the market to see if the higher price is worth it, and it is also part of the process.

Conclusion

Price discovery is undoubtedly one of the best ways to determine the price of a trading instrument. You should know that it's different from the term valuation. Valuation is a term used for the rate at which the instrument was last traded. But price discovery is a more practical way of finding the right price. If you also want to embark on a trading journey, open your free demat account with Motilal Oswal and start hassle-free trading.

 

Related Articles: What Are Thinly Traded Securities | Difference Between FII And DII | What Are The Impacts Of Buyback On Share Price | What Happens When a Company Buys Back Stocks

 

Popular Stocks:  HDFC Bank share price | ICICI Bank Share Price | UPL Share Price | Tata Consumer Share Price | Divislab Share Price

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