Price Discovery
The process by which market participants interact to determine the fair price of an asset through supply and demand.
What is Price Discovery?
Price discovery is the continuous process by which buyers and sellers interact through supply and demand to determine the market price of an asset, incorporating all available information about fundamentals, expectations, liquidity, and sentiment. Efficient price discovery requires active participation, transparency, and competition. Futures markets and pre-market trading often serve price-discovery functions before the primary market opens.
Example
When a company releases earnings after market hours, institutional investors analyze the results and trade in after-hours and pre-market sessions. By the time the regular market opens, the stock's price has already adjusted significantly, reflecting the price discovery that occurred overnight.
Source: SEC — Market Structure