Price Discovery

Price discovery is an important idea that needs to be understood well to trade any market, organized or un organized.

Un organized markets are typically with few suppliers / buyer / both. One of the groups may be more powerful. The price will get decided on the bargaining power of both groups.

For our discussions we shall ignore this sector of the markets that is un-organized.

After industrial revolution, organized markets started taking shape, whether in agriculture produce or commodities. The number of buyers / sellers in the market increased to a level these became mass markets.

Many participants entered who would be traders and not the suppliers or ultimate consumers. This group trades because they think the price may increase/decrease at some future point of time.

The price discovery happens based on judgments of the participants about the future value/price of the underlying. The future period it self is different for different participants. The longer term investor may look at next 1-3 years horizon. An intra day trader may look at a horizon of 1-30 minutes and others may have a view for time frames in between.