What is Price Discovery?

Price discovery is the process of determining the accurate price of an asset in the marketplace. This process is often used in the options and futures markets, or when an asset or class is new. When an event takes place that may have an effect on the price of an asset — like a major product release or executive shake-up at a publicly traded company — the short-term price will fluctuate until the event has been factored into the price. The reaction of the market represents the period of price discovery. For investors and traders, this phenomenon typically benefits individuals with more experience, knowledge, and access to changing market data.