What Is Historic Pricing?
Historic pricing is a unit pricing method used to calculate the value of an asset based on its last valuation point. This method is often employed when the value of an asset does not update in real-time.
Key Takeaways
- Historic pricing is used to determine an investment’s net asset value (NAV) based on its previous valuation point.
- Investors can use historic pricing to accurately calculate the total number of shares or units a specific amount of money will buy, but they run the risk that the last valuation may be stale.
- Forward pricing of NAV is more commonly used than historic pricing.
Understanding Historic Pricing
Historic pricing highlights the importance of knowing the exact time when an asset’s value was last calculated, whether at a specific point or various times during the trading day or in real-time. This moment is referred to as the valuation point. If an investor manages to trade exactly when the NAV is calculated, they avoid gaps in time that can impact their investment strategy.
However, if an investor trades before or after the NAV has been determined, they risk dealing with an outdated value. This could mean that the estimated valuation they based their trading decision on is inaccurate.
Mutual funds typically update their NAV at the end of the trading day. Fund managers have two choices: consult the last calculated NAV (historic valuation point), or observe the NAV at the next valuation point.
An investor purchasing a fund based on historic pricing knows precisely how many shares can be bought for a set amount of money. Conversely, sellers know exactly the amount of money they will receive for a specific number of shares. The risk for buyers is that the NAV decreases by the next valuation point, meaning they have overpaid for their shares. For sellers, the risk is that the shares grow in value at the next valuation point, resulting in a lower monetary gain.
Forward Pricing vs. Historic Pricing
Forward pricing is the most frequently used method for calculating NAV. It involves processing buy and sell orders for shares of open-ended mutual funds at the NAV as of the next market close.
Interestingly, open-ended mutual funds revalue their assets at the close of the trading day. Buyers face a disadvantage as they are uncertain about the number of shares they can purchase. This pricing mechanism ensures that the shares are bought and sold at a price that more accurately reflects any changes in the fund since the prior valuation.
Related Terms: net asset value, mutual funds, forward pricing, investment strategy, valuation points
