Understanding how assets are priced

The items in your weekly shopping basket may have different price tags and the same applies to investments on the market.

Unlike your groceries, the price of a fund unit or share ‘on the shelf’ might be different to the price you end up paying. Confused? You needn’t be as the system is less complicated than you think, and its fairly simple once you understand how funds and stocks are priced. Watch our video below on how to build an investment portfolio to get started.

How are funds priced?

If you search for a particular fund on our platform, you’ll see a price to buy a unit of that fund on the screen such as £7.50. That is the price at which the fund was last valued and may not be the price you are charged when placing a buy or sell order.

Funds are generally priced daily. They are priced at the same time every day, which is set by the fund manager, and the value of the fund will depend on the value of its underlying assets.

Each fund manager will have a cut-off point for when you can buy and sell the fund, and you need to place your order before that point if you wish to deal at that day’s price. You'll need to check the research page for each fund for the relevant cut-off point. If you instruct us to buy a fund after the cut-off point, you’ll normally buy at the following day’s price.

When you place an order for a fund, you specify the value of how much you want to buy or sell rather than selecting the number of fund units. The price you get will be shown on the contract note for the deal. You’ll normally receive your contract note the next business day.

How are shares priced?

Share prices fluctuate throughout the day, depending on many different factors, but here are a few of the most common reasons:

• Investor supply and demand
• Company news
• Economic factors
• Market sentiment

The share price will move higher if there are more buyers than sellers and fall if there are more sellers than buyers.

When you look up a stock on our website, the displayed price has a 15-minute delay. You can see live prices for any UK-listed share you hold in your account with us, although you may still pay a different price to buy or sell due to the fast-moving nature of the market.

When you place an order, you’re quoted a specific price and it’s normally fixed for 15 seconds. When this time runs out you need to request a new quote. While the deal is being placed, we are still checking for a better price for you and if we find one, then you’ll get the better price.

Sometimes your quote may become unavailable, for example when the market is volatile. In this situation, you would need to request a new quote, or if no online quote is available, you can call us on 0345 5432 600.

What are bid and offer prices?

Another key point to consider is that shares have a bid and offer price. The bid price is the maximum that the market is willing to pay for your shares when you sell them and the offer is the lowest price the market is willing to sell them to you. Once you’ve bought the shares, the type of price used to value them depends on where they are listed in the world and the time at which you see the information.

When you go shopping and see a t-shirt priced at £10 in one shop and £15 in another, you can quickly work out which one is a bargain, particularly if they are the same quality item. With shares, you cannot simply look at the share price and say one company is valued more or less than a comparative business. For example, shares in Company X might cost 35p whereas shares in Company Y cost £15. You might think Company X is this bargain in this example. The price doesn’t tell you anything about how the company is valued – instead, you need to look at various investment valuation metrics, such as comparing the price to how much earnings a company makes.

Also, companies typically have a different number of shares in issue, hence why you cannot use the share price in isolation as a measure of how cheap a company is.

How are ETFs priced?

Exchange-traded funds or ETFs also fall under the category of shares in terms of how they are priced. You buy and sell their shares on the stock market and their price can change throughout the day when markets are open for trading.

How are investment trusts priced?

Investment trusts are treated in the same way as individual company shares, rather than funds, when it comes to pricing. Their price can change throughout the day when markets are open for trading.

The price of an investment trust’s shares is based on what the market thinks they are worth, not the net asset value – also known as NAV – which is the value of all the underlying investments in the trust and is typically published by an investment trust once a day.

The market value of an investment trust’s shares is often different to the value of the trust’s underlying portfolio, hence why you can sometimes find trusts trading at a discount or premium to NAV.

Read more about investment trusts

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