The principle of price discovery in stock markets refers to the process through which the fair market price of a security is determined based on supply and demand. It reflects how buyers and sellers interact in the market, expressing their expectations, risk tolerance, and information through bids and offers. When many participants compete to buy and sell, the stock exchange acts as a platform that matches orders, allowing the current price to represent the consensus value of that asset at a given moment.

Price discovery is not just about numbers; it incorporates investor sentiment, company performance, macroeconomic factors, and even global events. For instance, strong earnings or positive economic data may increase demand for a stock, pushing its price higher. Conversely, negative news or weak financials can lower demand and bring prices down.

The process is dynamic, meaning prices constantly adjust as new information enters the market. Transparency, liquidity, and efficiency are essential for effective price discovery because they ensure that all participants can access the same information and trade fairly.

Understanding price discovery is vital for investors because it provides insight into whether a stock is overvalued, undervalued, or fairly priced. It helps them make better trading decisions, manage risk, and participate in markets more confidently.

The principle of price discovery is the market process of determining a security's fair value through the collective interaction of buyers and sellers. It is driven by the continuous flow of new information, including economic data, company news, and global events. As this information is absorbed, traders and investors place orders based on their revised valuations. The resulting bids and asks create a dynamic equilibrium where the current market price is established. This price reflects the consensus of all market participants at that moment, incorporating all known data and expectations about the future. Thus, stock exchanges act as central hubs for this vital, efficient information-processing mechanism.