What Is Historic Pricing?
Let me explain historic pricing to you directly: it's a unit pricing method I use to calculate an asset's value based on the last valuation point we have. I apply this when the asset's value doesn't update in real time.
Key Takeaways
- Historic pricing calculates an investment's net asset value (NAV) based on changes from its previous valuation.
- As an investor, you can accurately figure out how many shares or units a certain dollar amount will buy with historic pricing, but you risk that the last valuation is stale.
- Forward pricing of NAV is used more often than historic pricing.
Understanding Historic Pricing
You need to grasp why historic pricing matters: it shows the importance of knowing when assets last had their values calculated, whether at a specific point, various times during the trading day, or in real time. This is what we call the valuation point. If you trade exactly when the NAV is calculated, you don't have to worry about time gaps in your strategy.
But if you trade before or after the NAV is set, you're working with an old, potentially stale value. That introduces risk that your trading decision is based on an inaccurate estimate.
Mutual funds usually update their NAVs at the end of the trading day. As a fund manager, I have two choices: use the last calculated NAV, known as the historic valuation point, or wait for the next one.
If you're buying a fund with historic pricing, you know exactly how many shares you can get for your money since the valuation is set. Sellers know precisely what they'll receive for their shares. Your risk as a buyer is that the NAV drops by the next point, meaning you overpaid for those shares. As a seller, you risk the value rising, so you get less than you could have.
Forward Pricing vs Historic Pricing
Forward pricing is the most common way to calculate NAV. It processes buy and sell orders for open-ended mutual fund shares at the NAV of the next market close.
Open-ended mutual funds revalue assets at the trading day's end. As a buyer, you're at a disadvantage because you don't know upfront how many shares you'll get. This method ensures shares are traded at a price that better reflects any changes since the last valuation.
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