What are unit prices?
Have you ever wondered why investments can be so volatile? Over short periods of time, your investments can go up and down, and it’s hard not to feel nervous during a downswing.
However, there is a method to the madness, and it all starts with unit prices. This is a topic that isn’t talked about much, but developing an understanding of what units are and how their values fluctuate can give you a much better understanding of market behaviours as a whole, making you a more strategic investor.
So let’s start with the basics.
What are units?
Very simply, when you invest in a company you are giving your money to the company in exchange for a small part of it. When you do this, your contribution is combined with everyone else’s, and little shareholdings are divided among the investors proportionately with how much they contributed. These little pieces are called units.
The number of units that your contribution can get you depends on the prices of the individual units on a given day, which fluctuate.
What determines unit prices?
To put it simply, companies have ‘good’ and ‘bad’ days. On a good day, many investors are contributing to the company and buying units, making the demand higher and the individual price of each unit higher. On a bad day, however, more people are selling their units than buying more, making the unit prices lower.
Unit prices are calculated at the end of each business day based on the ratio of buyers to sellers. To determine the unit price, the net asset value, which is determined by calculating the difference between the company’s assets and liabilities, is divided by the number of units on issue.
The lower the unit price, the more units you can buy for the same amount of money invested.
What is the purpose of units?
You may be thinking that this is needlessly overcomplicated. If your investment buys you a portion of the company, why doesn’t your super fund provider give you exactly that? Why is your investment combined with those of other contributors, turned into an entirely different form of currency, and then handed back to you in a new form?
While on the surface, it may seem like units are just a way of making investing more difficult to understand, the truth is that they actually make it much easier and more efficient.
If everyone’s contributions were kept separate, super fund providers would need to invest in companies individually — one transaction for every contribution. This would slow down the process immensely, wasting precious time for people trying to get a jump start on retirement savings. Plus, it would add unnecessary costs that would have to be passed onto super fund members.
By combining everyone's contributions and dividing them up as units, however, super fund providers can decrease the number of transactions they need to make while investing. The investments can be contributed as one lump sum, and the returns can be divided up based on the amount of units each investor had originally purchased.
How can investors be strategic?
Unit prices are generally unpredictable. High-risk investments see a lot of fluctuations, while lower-risk investments are more stagnant, but still volatile to a degree. The amount of risk you decide to take will depend on the amount of time you have before retirement as well as your goals and general lifestyle.
Some people try to time the market by researching company trends and keeping up with consumer opinions, but this can be a dangerous tactic. Timing the market can cause you to miss out on strong investment returns of a company, which often happen right after a downswing.
When you contribute to your super fund regularly, you make frequent contributions to companies and receive units every time you do so. By being consistent, you are likely to invest on some good days and some bad days. Keeping a close eye on your investments can be nerve-wracking, but seeing a downturn might not be as bad as you may think.
If you see a drop in unit prices, that is typically due to a downturn in the investment market. You may panic and want to recover your money before the unit prices dip any lower, but that is potentially a mistake. The volatility of the market will likely work in your favour eventually, especially with a diverse, carefully selected portfolio managed by experts at Active Super.
Therefore, when you see unit prices drop, have faith. This is normal! Your super fund managers will continue to do their job and spread your investments the way you intended, giving you an array of possibilities for you to grow your money. When an investment experiences a downswing, you will have more buying power to procure units. Then, if and when the upswing comes, your investments may soar and your wealth could grow exponentially.
How Active Super can help
At Active Super, we know that unit prices can be confusing. We are here to answer all of your questions, and we will also handle all of the investment strategising that you don’t feel equipped to handle on your own.
When an Active Super representative sets you up with an investment portfolio that matches the amount of risk you want to take, you can rest assured that our informed decisions will fall in line with your goals. When you want to take matters into your own hands, we can help guide you through that process, too.
To learn more about unit prices and our investment strategies, contact us today.