Price discovery

Price discovery is the process by which buyers and sellers establish market prices through trading. It incorporates information, expectations, and willingness to trade into transaction prices.

Order book: An electronic or written list of buy and sell orders for a financial instrument, organized by price. Its bids and offers reveal current supply and demand before trades occur.
Supply and demand: The relationship between the quantities buyers want and sellers offer at different prices. Their intersection provides the basic economic model of an equilibrium price.
Foreign exchange market: A global market where currencies are bought and sold against one another. Its decentralized, nearly continuous trading combines prices across many venues.
Posted price: A price announced by a seller or authority rather than formed directly through current bargaining or trading. It can remain fixed even when buyer and seller orders would imply a different clearing price.
Bid–ask spread: The difference between the highest price a buyer will pay and the lowest price a seller will accept. The spread measures disagreement and trading costs around the emerging market price.
Information asymmetry: A condition in which parties to an exchange possess different information relevant to its value. Uneven information changes which orders traders submit and what prices they accept.
Initial public offering: The first sale of a company’s shares to public investors. Underwriters and investors negotiate an offer price before ordinary exchange trading begins.
Fundamental value: An estimate of an asset’s worth based on expected future cash flows or other underlying benefits. It is an analytical estimate, whereas a market price is formed through actual transactions.
Market microstructure: The study of how trading rules, participants, and information shape financial markets and prices. It explains how venue design and trading behavior affect price formation.
Liquidity: The ease of buying or selling an asset quickly without substantially changing its price. Thin liquidity makes prices more sensitive to individual trades.

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