Historic Pricing

DEFINITION of 'Historic Pricing'

A unit pricing method for calculating the value of an asset using the last valuation point calculated. Historic pricing is used when the value of an asset does not update in real-time, and entails looking backward as opposed to forward pricing.

BREAKING DOWN 'Historic Pricing'

Some assets have their values calculated at a certain point or points during the day rather than in real time. This is referred to as the valuation point. If an investor happens to trade at the exact point that the net asset value is calculated then he or she does not have to worry about gaps in time. However, if an investor trades before or after the net asset value is calculated he or she will be working off an old calculation. This means that the valuation carries the risk of being inaccurate.

Mutual funds typically update their net asset values at the close of the trading day. Fund managers have the option of looking at the last calculated net asset value – the historic valuation point – or the net asset value of the next valuation point.

An investor looking to buy a fund based on historic pricing knows how many shares can be purchased for a certain amount of money because the valuation point has already been published. In turn, sellers know exactly how much money they can get for a specific number of shares. The risk facing the buyer is that the net asset value of the fund will decrease by the next valuation point, meaning that he or she will have spent more for a given number of shares. The risk for the seller is that the shares may increase in value at the next valuation point, meaning that the seller doesn’t make as much money for a given number of shares.

Forward pricing is the most commonly used net asset value calculation method. It entails buying or selling an asset based on the price at the next valuation period. The disadvantage to the buyer is that he or she does not know how many fund shares can be purchased for a certain amount of money.