Question
I know that the price of shares increases and decreases according to the supply and demand so if more investors are buying a share the price increases. Is this the same for OEICs?
Or is the buying price dependent on the performance of the fund and not on whether more people are buying it or selling?
Thank you very much for assisting in this query.Answer
The simple answer is no, it isn't the same for Oeics, although demand could still potentially affect the price of units - I'll come onto this in a moment.
The reason share prices are so sensitive to investor demand is that companies have a fixed amount of shares in issue. So if you want to buy shares in company X you'll have to pay the price that someone else is willing to sell at. If there are more potential buyers than sellers this will likely push up price to the point sufficient shareholders are tempted to sell and meet buyer demand. And if more sellers, the price will likely fall until sufficient buyers are tempted to once again balance demand and supply.
Funds (including Oeics) are different because fund managers can simply create new units or cancel existing ones to satisfy investors wishing to buy or sell. So the price is set by the value of the underlying investments held in the fund - not the market for that fund.
However, there are still instances when very high demand for a fund or a lot of existing investors wishing to sell can affect price to an extent.
Let's suppose there are way more investors wishing to sell than buy units in Fund X. The fund manager will have no option but to cancel units and correspondingly sell underlying investments in the fund. If the manager must sell a significant quantity of shares this might reduce the price he/she can get for them on the stock market, in turn reducing the fund's price.
Furthermore, in the above example the fund will incur dealing charges when selling the underlying investments. In a unit trust the fund recoups these by reducing the sell price a little to reflect the cost (technically called widening the bid-offer spread), but as Oeics can only have a single buy/sell price the additional cost is recouped via a 'dilution levy' on those investors selling units. Note: the fund manager doesn't benefit from these manoeuvres, they're implemented to protect the remaining investors in the fund from losing out.
The above also applies when fund managers need to create a large number of new units to satisfy demand - i.e. the buying price will rise to reflect the cost of a dilution levy may be used for Oeics.
I know that the price of shares increases and decreases according to the supply and demand so if more investors are buying a share the price increases. Is this the same for OEICs?
Or is the buying price dependent on the performance of the fund and not on whether more people are buying it or selling?
Thank you very much for assisting in this query.Answer
The simple answer is no, it isn't the same for Oeics, although demand could still potentially affect the price of units - I'll come onto this in a moment.
The reason share prices are so sensitive to investor demand is that companies have a fixed amount of shares in issue. So if you want to buy shares in company X you'll have to pay the price that someone else is willing to sell at. If there are more potential buyers than sellers this will likely push up price to the point sufficient shareholders are tempted to sell and meet buyer demand. And if more sellers, the price will likely fall until sufficient buyers are tempted to once again balance demand and supply.
Funds (including Oeics) are different because fund managers can simply create new units or cancel existing ones to satisfy investors wishing to buy or sell. So the price is set by the value of the underlying investments held in the fund - not the market for that fund.
However, there are still instances when very high demand for a fund or a lot of existing investors wishing to sell can affect price to an extent.
Let's suppose there are way more investors wishing to sell than buy units in Fund X. The fund manager will have no option but to cancel units and correspondingly sell underlying investments in the fund. If the manager must sell a significant quantity of shares this might reduce the price he/she can get for them on the stock market, in turn reducing the fund's price.
Furthermore, in the above example the fund will incur dealing charges when selling the underlying investments. In a unit trust the fund recoups these by reducing the sell price a little to reflect the cost (technically called widening the bid-offer spread), but as Oeics can only have a single buy/sell price the additional cost is recouped via a 'dilution levy' on those investors selling units. Note: the fund manager doesn't benefit from these manoeuvres, they're implemented to protect the remaining investors in the fund from losing out.
The above also applies when fund managers need to create a large number of new units to satisfy demand - i.e. the buying price will rise to reflect the cost of a dilution levy may be used for Oeics.
Read this Q and A at http://www.candidmoney.com/askjustin/830/are-fund-prices-affected-by-demand
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