Finance: What is Forward Pricing?

What is Forward Pricing? Forward pricing is used in mutual fund pricing and just says that the companies that sell mutual funds must sell them at the price according to their next net asset value.

College and CareerPersonal Finance
CoursesFinance Concepts
FinanceFinance Definitions
Financial Responsibility
Personal Finance
Finance and EconomicsTerms and Concepts
LanguageEnglish Language
Life SkillsFinance Definitions
Personal Finance
SubjectsFinance and Economics

Transcript

00:27

minute too many complexities and too many

00:29

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

00:34

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

00:38

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

00:42

mutual funds can have literally thousands of investments in them well

00:46

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

00:52

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

00:58

cash and accounting for any other special holdings like a private

01:02

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

01:06

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

01:10

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

01:13

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

01:18

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

01:22

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

01:27

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

01:32

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

01:37

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

01:41

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

01:45

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

01:51

11.87 or 11,870 dollars to buy

01:55

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

01:59

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

02:03

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

02:07

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

02:13

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

02:18

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

02:23

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

02:26

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

02:31

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

02:36

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

02:41

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

02:46

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

02:50

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

02:54

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

02:57

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

03:01

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

03:06

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

03:11

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

03:16

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

03:19

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

03:23

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