The marketplace on Abundance lets you purchase investments from other investors who are looking to sell. A seller will choose an amount of a particular investment that they are looking to sell and set a price that they want for their investment.
It is up to you to choose the price you are willing to sell or buy an investment for on the marketplace but this article provides a summary of some things to consider when choosing a price.
How the price affects the return for a buyer
As a buyer, the price you pay will determine the effective return you will get from purchasing the investment. For example, let’s assume you are buying £1,000 of an investment that has 1 year remaining and pays 5% interest a year. If you buy this investment you will receive back £1,050 at maturity (£1,000 of capital, and £50 of interest). If you pay £950 for that investment, your effective return would be 10.5%, but if you paid £1,010 your effective return would be 4.0%.
As a seller, the price you set will affect the demand for your investment, as it will make it more or less attractive for prospective buyers. Setting a higher price will mean a lower effective return for someone who buys it, which might mean it takes longer for you to sell, or that there are no buyers who are interested.
For each offer to sell an investment on the marketplace, you will see the effective return the buyer would get if the investment is purchased at that price. This return, shown as an IRR, takes into account the amount paid for the investment, the outstanding payments still due on that investment, and when they are due to be paid. You can learn more about an IRR here.
As a buyer, your effective rate of return may be higher or lower than the original rate of return on the investment when it first launched, depending on the price set by the seller. For example, if an investment is popular, a seller may set a higher price which means buyers will get a lower effective rate of return than the original investment rate. Or if the investment has run into difficulties and missed a payment to investors, the seller may be willing to accept an amount less than their outstanding capital (the amount they invested) which would mean buyers get a higher return than the original rate - but remember, this would likely come with an increased risk of losing some or all of your money if the investment is in difficulty.
Supply and demand
As with any market, the supply and demand for a particular investment can affect the price.
If there are a large number of people looking to sell the same investment, the price might fall as sellers are willing to accept a lower price to get a quicker sale. Alternatively, if there is a lot of demand from buyers for a particular investment, the price might increase as buyers are willing to pay more to make sure they can invest.
Payments remaining on the investment
When an investor purchases an investment from another investor, they will receive all future payments that are still due on that investment. For a particular investment put up for sale, you will see the total amount that is still due to be paid back as well as the full payment schedule which sets out what has been paid so far and what is still due to be paid and when.
If a buyer purchases an investment before a payment is due to be made, the buyer will receive the full payment for that period. For this reason, a seller may look to set a price that lets them receive back an amount equivalent to the period they have held the investment since the last payment.
Take the example where an investor made an investment of £1,000 that pays 8% per year, with a single annual interest payment of £80 on 31 December each year. If the investor decides to sell the investment halfway through the year, at that point the investment will have accrued £40 of interest (half the year at 8%), but the investor won’t have received that as the investment doesn’t pay out until the end of the year. If they sell the investment at a price of £1,000 they will get their original investment amount back, but will forgo the interest for the period they held the investment over the first half of the year until the point they sold. The buyer will receive the full payment of interest as they are the holder of the investment of the date of the payment, in this case £80 on 31 December. The investor may therefore consider selling the investment at £1,040, a price which includes the interest accrued but not paid since the previous payment made by the investment.
Track record and changing risk
It is important to consider all the information available on a particular investment, including any updates or events that have happened since the investment was originally offered. This includes information regarding payments successfully made by the company or local authority and any updates that have been provided, but remember that past performance is not a guide to future performance.
The types of update provided will depend on whether the investment is from a company or local authority, the use of the money raised, and the nature of the business. The updates may provide important information on how the company or local authority is performing which in turn may impact the risks of the investment and therefore the price that investors are willing to pay for an investment. For example, an operational renewable energy project may provide an update notifying investors of an operational issue. Or a company constructing a new project may notify investors that their project is proceeding on time and on budget.
The market interest rate
The interest rates in the wider market may go up and down over time. This may affect the price an investor would be willing to pay for an investment if better rates for products with similar features and risk profile are available elsewhere.
If the interest rate for other similar investments increases, you may want to pay less for the investment to ensure you receive an effective rate of return on your investment which matches the current market rate. Conversely, if interest rates fall you may want to pay more for an investment that has a higher rate than you can get elsewhere.
The longer the outstanding term period on the investment, the greater the impact a change of interest rate may have on the value of that investment. To learn more about the effect of a change in market interest rates, click here.
Always remember, there are risks when investing on Abundance, including when investing on the marketplace. Your capital is at risk and you could lose all the money you invest. The return on your investment depends on the ability of the company or council you have invested in to pay your returns. Investments on Abundance are generally long term and you should be prepared to hold them to maturity. The investments are illiquid and you may not be able to sell them if you need your money back earlier, and their value can rise or fall. Quoted returns are no guarantee of future returns and past performance is not a guide to future performance.