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. Investors do not need to emphasize price fluctuations during the transaction execution time – the time at which the transaction is executed – and the preceding valuation point if they have the current and precise price or valuation at the transaction execution time.

 

 

When an investor trades without knowing the most recent net asset value, the valuation or price point they are using as a reference point may be 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 updated as time passed.

 

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.
  • The importance of knowing and understanding when the valuation point of assets is can be demonstrated through historic pricing.
  • Through historic pricing, an investor seeking to invest in a fund will know when the valuation point is and, therefore, will get an idea about 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 valuation time gaps as a potential part of the strategy. It is common when the investor executes a trade without having the real-time net asset value figure – i.e., the investor performs a trade before or after the net asset value of the financial asset. In such a case, the investor made 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 kept up to date with real-time values – is demonstrated through historic pricing.

Through historic pricing, an investor seeking to invest in a fund will 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 always a risk associated with the uncertainty of what the price or value of an asset might be at the next valuation point. 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 (also known as NAV) is a valuation method commonly performed to determine the market value (per share) of a fund. This “per share” value is the purchase or “bid” price 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 about mutual funds and is used to calculate the value of the assets owned by the fund. Mutual funds tend to 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. Investors buy or sell off their shares in a fund at the fund’s market value per share. 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

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