Price discovery

The continuous process by which buyers and sellers transacting produce a current market price for an asset.

Example

Each executed trade updates the last price, and the resting orders around it show where the next ones are likely to occur.

Important

Price discovery reveals what the marginal buyer and seller agreed, not what the asset is worth. It is an observation about two counterparties, not a valuation.

Related terms

  • Order book — The live, price-ranked list of all resting buy and sell orders for a security, showing how many shares are available at each level on each side.
  • Market maker — A participant that continuously quotes both a buying and a selling price in a security, standing ready to trade with either side and earning the spread between the two.
  • Valuation — An estimate of what an asset is worth, as distinct from the price it currently trades at. Built from what the asset produces plus judgements about growth, duration and required return.
  • Intrinsic value — What an asset is worth on the basis of what it will produce for its owner, independent of what anyone is currently willing to pay for it.

Lessons that explain it

  • Many venues, no closing bell, no reference price — The quote is for the next unit, not for your position, and there is no official price anywhere. What valuation models exist for this class are contested in a way that a bond discount or an equity multiple simply is not. (12 min)
  • A continuous auction: what the quote is, and what it is not — The price is what the marginal buyer and the marginal seller agreed a moment ago. It is a fact about two people, and it is not a valuation. (12 min)
  • No closing bell: comparables, appraisal and the cap rate — Nothing quotes this asset. Its price comes from three negotiated sales that happened months ago, adjusted by somebody's judgement - and from an income lens that is more honest and much less popular. (11 min)

All 578 terms in the Investing glossary