What is price discovery?
The price you see on the screen is simply the price at which the last trade took place. Someone says “I’ll buy at Tk 50”, someone else says “I’ll sell at Tk 51”. Until both sides agree on one price, nothing trades. When they do, that price becomes the new “market price”.
Every buyer and seller places orders with their own information, sums, hopes and fears. The price that comes out of all those orders is a running “vote” of everyone in the market. When news arrives, the vote changes and so does the price. So a price is not the company’s true worth; it is a picture of what people are willing to pay and accept right now.
Think of a cattle market the day before Eid. There is no official price. The seller asks Tk 1,20,000, the buyer offers Tk 90,000. Haggling settles on a price somewhere, and word spreads through the market: “cows this size are going for about a lakh today.” If cattle run short by the afternoon, prices rise; if there are plenty left, they fall. The stock market does the same job, only on a computer and second by second instead of in a field. The numbers are only an example.
Why it matters to an investor
- To separate price from value: the screen price is only the last trade. What the business is actually worth is a separate question.
- To spot a hidden cost: there is a gap (the spread) between the price you can buy at and the price you can sell at. Buying and selling straight away costs you that gap, on top of broker commission.
- To see the risk in thinly traded shares: where there are few buyers and sellers, a handful of orders can make the price jump, and selling at a fair price when you need to can be hard.
- To understand how news and rumours work: prices move when expectations change. If news is already widely known, the price may barely move on the day it is announced.
The order book: two queues
The exchange’s computer keeps an “order book” for every share. On one side is the queue of buyers: who wants to buy how many at what price, called bids. On the other is the queue of sellers: who wants to sell at what price, called asks or offers. The gap between the highest bid and the lowest ask is the spread.
Electronic exchanges generally match orders automatically: as soon as a buyer’s price reaches a seller’s price, a trade happens. When several people are at the same price, usually whoever ordered first is filled first. No person “decides” the price; it comes out of the orders themselves.
- Shares that trade heavily every day usually have a narrow spread and plenty of orders on both sides. Thinly traded shares have wider spreads and shallow queues.
How the day’s prices form on DSE
Since November 2020, the Dhaka Stock Exchange has run a 15-minute pre-opening session before the main session starts. Orders are collected during this time but not matched straight away. The opening price is then the price at which the most orders can be matched. Before this, the previous day’s closing price was the starting point.
During the regular session, orders are matched all day. The day’s “closing price”, however, is not the last trade: both exchanges calculate it from the average price of trades in the last 30 minutes. A 10-minute post-closing session then allows trading only at that closing price. Trading hours and these rules change from time to time, for example during Ramadan; the exchanges’ websites carry the current rules.
Why the price moves
- New information: results, dividend announcements, interest rates, economic news. When expectations change, so do the prices people put on their orders.
- Who is in more of a hurry: someone who must buy now has to pay the sellers’ price; someone who must sell now has to accept the buyers’ price. Prices drift towards whichever side is more impatient.
- Money flows: when fresh money enters the market, many shares can rise together; when it leaves, they can fall together, without any company news.
- Rumours and manipulation: in a share with a thin order book, a small amount of money can push the price up. That is one reason the regulator watches for unusual price moves.
Worked example
- Say a share’s order book looks like this. Buyers: 300 at Tk 50.00, 500 at Tk 49.90. Sellers: 200 at Tk 50.20, 400 at Tk 50.30. The last trade was at Tk 50.10. The spread is Tk 0.20.
- Rumana wants 500 shares right now and is willing to pay up to Tk 50.30. She first gets 200 at Tk 50.20 (Tk 10,040), then 300 at Tk 50.30 (Tk 15,090). Total Tk 25,130, an average of Tk 50.26 a share.
- The last trade is now at Tk 50.30. With no company news at all, the screen price has gone from Tk 50.10 to Tk 50.30, about 0.4% higher. If Rumana wanted to sell straight away, the best bid would give her only Tk 50.00.
Result: the price moves when someone crosses the spread and accepts the other side’s price. Trading in a hurry costs you the spread. The thinner a share’s queues, the further one order moves its price. The numbers are only an example.
Common mistakes
- Treating the screen price as the company’s “true worth”. It is only the price of the last trade.
- Assuming “the price is rising, so there must be good news inside”. In thinly traded shares, a few orders can make the price jump.
- Ignoring the spread, especially when trading often. You pay that gap every time.
- Assuming you can sell any number of shares at the quoted price. Selling a large amount can push the price down.
No one sets a share’s price; it is wherever buyers’ and sellers’ orders meet. The screen price is the last trade, not a verdict on what the company is worth.