The one constant in investing is change. Asset prices are always going up and down as investors buy and sell.
Buying assets isn’t like shopping on the high street. 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?
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:
- Prices of the underlying assets
- ETFs are composed of a basket of assets, such as stocks, bonds, or commodities. If the prices of the underlying assets in the ETF fluctuate (e.g. the stocks in a stock ETF or the bonds in a bond ETF), this directly impacts the ETF’s price. For example, if the stocks in an equity ETF experience sharp declines, the ETF’s price will fall accordingly.
- Currency risk
- For ETFs holding foreign assets, fluctuations in exchange rates can affect their prices. If the currency of the country where the underlying assets are located weakens against the ETF’s base currency (which is GBP for all InvestEngine’s ETFs), this can reduce the ETF’s value. Currency risk is particularly relevant for global and emerging market ETFs.
- Dividend payments
- When an ETF distributes dividends to shareholders, the ETF’s price often drops by the amount of the distribution. This can result in short-term price fluctuations that are not reflective of changes in the underlying assets.
- Bid and offer spread
- ETFs which trade infrequently may experience larger price swings due to the lack of buyers or sellers in the market. This can lead to wider “bid-ask spreads” (the difference between the prices quoted for an immediate sale (ask) and an immediate purchase (bid)), making it harder for investors to buy or sell at the desired price. Liquidity issues can result in price deviations from the actual value of the ETF’s underlying assets.
- 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 reflected in the price of the ETF. When an ETF takes its fee, the price of the ETF is reduced by the amount taken in fees.
When does InvestEngine trade?
InvestEngine executes trades once a day, with a cutoff at 2pm. If you choose to execute trades in your portfolio after the cutoff time, your trades will be executed the following trading day.
Please be aware that prices will fluctuate (for the reasons mentioned above) between the time your order is submitted and the time your order is executed. This can be up to 24 hours for trades submitted after our 2pm cutoff. All prices quoted on the platform are indicative prices only, and you therefore may not receive the same price at execution as when you submitted your trades.
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.