Historic Pricing

A method used to determine the net asset value of a fund or other financial instruments by making use of a preceding valuation point

What is Historic Pricing?

Historic pricing is a method used to determine the net asset value of a fund or other financial instruments by making use of a preceding valuation point. This allows investors to know the price they will buy or sell the fund at, which can be calculated at the end of the previous trading day, at various points during the day or in real time..

 

 

The buyer’s risk is that the value of the fund has changed since that valuation point and is inaccurate. The historic pricing method is used when the real-time net asset value is not available, and the value of the asset has not been recently updated.

 

Summary

  • Historic pricing is a method used to determine the net asset value of a fund or other financial instruments by making use of a preceding valuation point.
  • It is important to know and understand when the valuation point of assets is calculated, as it will determine the trade price.
  • Through historic pricing, an investor seeking to invest in a fund will know when the valuation point is, and therefore, can determine the number of shares that can be bought with a given sum of money.

 

Importance of Historic Pricing

When developing an investment strategy, investors must consider a fund’s valuation point as a factor in when they execute their trades. It is common that an investor executes a trade in a fund that doesn’t provide a real-time net asset value figure. In such cases, funds often use historical pricing which causes the investor to make a trading decision based on old information and calculations, which can lead to inaccuracies in the valuation of the financial asset.

The importance of knowing and understanding when the valuation point of assets is, e.g., whether the valuation is done at a specific time in the day, at different time intervals throughout the trading day, or in real-time is important to the investor as it will impact the price used to make the trade.

Through historic pricing, an investor seeking to invest in a fund should know when the valuation point is and, therefore, will have an idea of the number of shares that can be bought with a given sum of money. Similarly, the sellers looking to exit certain investments will also know the earnings they can expect to generate from selling off a certain number of shares.

As with all traded financial assets, price fluctuations can occur. As a result, there is a risk that the historic price paid (or sold at) is different from the actual NAV at the time of purchase (or sale).. The net asset value may decrease, and it would mean that an investor has paid more for a certain number of shares, which can now be purchased at a lower valuation.

Similarly, the risk of uncertainty of what the price or value of an asset might be at the next valuation point is also shared by a seller. A potential increase in the net asset value would mean that the seller sold off shares at a lower price, thereby foregoing the gains that could have been attained at the present valuation point.

 

Net Asset Value (NAV)

The net asset value (NAV) is a valuation method that determines the market value (per share) of a fund. This “per share” value is the purchase or “bid” price established for investors to purchase or sell shares. The selling price is known as the redemption price.

The net asset value is found by subtracting a fund’s liabilities from its total cash and securities (assets) and then dividing that figure by the market capitalization (total number of shares outstanding). The term “net asset value” is widely used to calculate the value of mutual funds. Mutual funds typically have one valuation point (i.e., at the end of the trading day).

 

Historic Pricing - NAV Formula

 

The NAV denotes the market value of a fund at a point in time (valuation point). Investors buy or sell their shares in a fund at the fund’s valuation point. The securities (assets) held by a fund determine its value. An increase in the value of securities in a fund increases the net asset value. In contrast, a decline in the value of securities in a fund’s portfolio will result in a decrease in NAV of the fund.

 

Additional Resources

CFI offers the Capital Markets & Securities Analyst (CMSA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Asset Management
  • Market Capitalization
  • NAVPS
  • Investing: A Beginner’s Guide

Corporate Finance Training

Advance your career in investment banking, private equity, FP&A, treasury, corporate development and other areas of corporate finance.

Enroll in CFI’s Finance Courses

to take your career to the next level! Learn step-by-step from professional Wall Street instructors today.