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NISM Certifications · NISM-Series-VI: Depository Operations · Introduction to the Indian Capital Market

A DP client, Meera Iyer, asks why the stock exchange is described as providing 'price discovery' in the secondary market. What does this mean?

Price discovery means that the price of a security emerges from the interaction of buy and sell orders placed by numerous market participants on the exchange, reflecting demand and supply, rather than being fixed by the regulator, depository or issuer.

  1. APrices of securities are fixed daily by SEBI
  2. BPrices are determined by the interaction of buy and sell orders from many participantsCorrect
  3. CPrices are set by the depository on the basis of holdings
  4. DPrices are determined by the issuer company at each trade

Explanation

On an exchange, the continuous interaction of demand and supply through buy and sell orders determines the traded price. Neither SEBI, depositories nor issuers fix the trade price, so the other options are wrong.

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