Price Discovery is the process through which the fair market value of a security, commodity, or asset is determined based on demand and supply dynamics in the market. It plays a crucial role in financial markets by ensuring transparency and efficiency, allowing investors to make informed decisions. The process involves continuous interaction between buyers and sellers, where their bids and offers reflect real-time market sentiment and information.

In stock markets, price discovery happens when traders place buy and sell orders through an exchange platform. These orders reflect participantsí expectations about a companyís future performance, macroeconomic conditions, and market trends. The final traded price represents the equilibrium point where demand meets supply. This ensures that the price is not influenced by any single participant but rather by collective market behavior.

Several factors impact the price discovery mechanism, such as liquidity, market transparency, trading volume, and the availability of relevant information. High liquidity and active participation lead to more accurate and efficient price discovery, whereas low liquidity or restricted information can cause price distortions. Regulatory bodies like SEBI ensure that markets remain fair and transparent so that the price discovery process reflects genuine market forces.

Modern technologies and electronic trading systems have further enhanced the speed and accuracy of price discovery by processing large volumes of data in real time. For investors and traders, understanding how prices are discovered helps in evaluating entry and exit points, assessing market sentiment, and making rational investment decisions. In essence, price discovery serves as the foundation of market efficiency, ensuring that prices continuously adjust to reflect all available information.