Forward Price

See: Forward Pricing.

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Finance: What is Forward Pricing?12 Views

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Finance a la shmoop what is forward pricing?

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well open-ended mutual funds trade the shares within them all day long buy

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orders sell orders that stuff but the price of a given share of that mutual [Mutual funds appear with share price]

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fund does not in fact change every second of the trading day like the

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shares do inside of it like its NAV price does not suddenly change every

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minute too many complexities and too many

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moving parts derived from a free computer in every bathroom era when

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manual labor had to add numbers and figure out totals we just can't operate [Person jotting down numbers]

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funds such that they adjust every second of the day especially when the larger

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mutual funds can have literally thousands of investments in them well

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the price of a share of a mutual fund is its net asset value and is derived by

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adding up all the bid prices offered to buy a given security and then adding in

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cash and accounting for any other special holdings like a private

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company's not yet public and then taking a discount to them that's fair because

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there's more risk when they're not public and traded in the market setting

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a price on them every minute right all right and then once you have all that

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totaled you divide by the number of shares outstanding of the mutual funds [NAV formula appears]

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so if you put in an order at 10:37 a.m. to buy a thousand shares of a given [Man checks watch]

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mutual fund the seller can't actually give you an exact price that's how you

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want to buy that fund the close yesterday was $11.87 share in the market

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today is flattish so it's highly likely that at the close of this day well the

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price will be about 11.87 but who knows it might be eleven eighty nine it might

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be eleven eighty four or somewhere else in that neighborhood so the fund has to

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give you forward pricing such that you commit well about a thousand times about

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11.87 or 11,870 dollars to buy

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these thousand mutual fund shares but you won't get the exact total or bill I

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guess until the market is closed and the totals have been you know totaled and [Bell rings and clock strikes 4pm]

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then at that point you can become the proud new owner of a thousand shares of

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the feeling is mutual fund so this situation revolves around the exact

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act number of mutual funds shares method of buying meaning you want a thousand

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shares of the mutual fund you want to pay $11.87 and you pay 11,870

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dollars for the privilege okay [Man discussing purchasing of mutual fund]

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the much more common way of buying shares in a mutual fund company is to

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buy fractional shares and simply commit a dollar amount that's about what you

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want to invest in the mutual fund like let's say you had about 12 grand that

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you wanted to invest and that's it 12 grand so on that day you're actually

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rooting for the NAV to go down the day that you actually buy the fund [Girl celebrating for NAV to decrease]

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well why would you root for it to go down? well you don't own it yet if it

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goes down you get the same shares cheaper right because the more it falls

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the higher the number of shares at NAV of that mutual fund you're buying with

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your 12 grand so if the nav closes at 11.87 and you're buying 12

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grand worth well then you get twelve thousand dollars divided by 11.87

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or one 1,011 shares right and there gets to be

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fractionals in there as well if you really want to get technical that's [Man discussing fractionals]

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forward pricing not to be confused with fast forward pricing which requires the

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use of a remote control and two double-a batteries [Remote control and batteries appear]

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