Explain the mechanism of price discovery in the secondary market. In your answer, discuss the roles of supply and demand, market orders, and the impact of corporate announcements such as dividend declarations on the stock price. Illustrate with a numerical example showing how a dividend announcement can lead to a change in the market price of a share.

Step-by-step solution

1. State that price discovery is the process by which the market determines the equilibrium price of a security through continuous trading.
2. Explain that buyers create demand and sellers create supply; the point where they meet sets the market price.
3. Describe market orders (buy and sell) as the instrument that expresses this demand‑supply interaction in real time.
4. Mention that new information, such as corporate announcements, shifts either demand or supply, causing price adjustments.
5. Introduce the dividend example: suppose a share trades at ₹102 before a ₹2 per share dividend is declared. On the ex‑dividend date, the right to receive the dividend is detached, so the share typically drops by the dividend amount, trading around ₹100.
6. Conclude that this immediate drop demonstrates how the market incorporates new information, completing the price‑discovery cycle.

Concept tested: Price discovery in secondary market

Published 13 October 2026 · How this solution was prepared and checked