Originally published at: How asset pricing works – InvestEngine Insights
The one constant in investing is change. Asset prices are forever going up and down as investors buy and sell in search of returns.
Buying assets isn’t like shopping on the high street, though. Prices are subject to change and it can be difficult to get an exact figure for how much you’ll end up paying at completion.
Investors should be aware that the executed (final) price of an asset is often slightly different to the market price at purchase. This is because prices fluctuate quickly, and they can change between the request and the execution of a trade.
There are a number of reasons for this discrepancy, and this article is intended to provide a little more clarity into how trading works, both generally and on our platform specifically.
Why do prices fluctuate?
So, when you buy assets, you very rarely get the exact market price. This is a normal part of investing that may not be immediately obvious.
ETF prices can vary for a number of reasons, these may include one or a combination of the following:
- Price of the underlying asset
- This is the underlying securities within the ETFs changing in price
- Premium and discounts
- The price of an ETF can trade at a premium or a discount relative to its net asset value (NAV). A premium is when the price is higher than the net asset value. A discount refers to the price being lower than the net asset value.
- Total expense ratio
- The expense ratio is the ongoing cost of owning the ETF, this is charged by the product provider and factored into the price of the ETF.
- Bid and offer spread
- The liquidity of the ETF is another factor that impacts the price, a tighter spreads tends to indicate a more liquid ETF.
- ETFs with lower assets under management tend to have a wider bid/offer spread to reflect the lower levels of liquidity.
When does InvestEngine trade?
InvestEngine executes trades once a day around 2pm, if you choose to execute trades in your portfolio after the cutoff time, your trades will be executed the following trading day.
Why we do this
Trading in bulk is an important part of how we keep costs so low for you, our customers.
Whilst we place over 20,000 orders a month, by aggregating trades we are able to gain more competitive prices and tighter spreads versus executing smaller orders.
So, depending on when you buy your assets, the price can vary slightly from that which is shown. It’s a byproduct of our commitment to keeping costs as low as possible for our customers. Also, any discrepancy is ordinarily small when considered within the context of a long-term investment strategy.
If you have any more questions about how InvestEngine or the wider trading landscape works, check out our FAQs page or send an email to info@investengine.com and a member of our team will be on hand to help.
Important information
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.