Definition§
Forward pricing is a method utilized by open-end investment companies to price their shares. The key characteristic of forward pricing is that the price of the shares is based on the net asset value (NAV) of the outstanding shares, calculated after the incoming buy and sell orders are received. This ensures that the price an investor pays or receives is based on the most current valuation.
In practical terms, when an investor places a buy or sell order for shares of a mutual fund using forward pricing, the transaction is completed at the next computed NAV, which can occur multiple times throughout the day.
Examples§
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Mutual Funds:
- Example Scenario: An investor submits a request to purchase shares of a mutual fund at 1 PM. The next NAV calculation occurs at 4 PM. The purchase price will be based on the NAV at the 4 PM valuation, not at the time the order was placed.
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Retirement Accounts:
- Example Scenario: An individual reallocates assets within their 401(k) plan from one mutual fund to another at 10 AM. The value of fund shares they receive from the new fund will be determined based on the NAV determined at the next NAV computation time of the mutual funds involved, typically the end of the trading day.
Frequently Asked Questions§
How often is the NAV calculated?§
NAV is generally calculated once per business day, typically at the close of the trading day.
What is the main benefit of forward pricing?§
The primary benefit is that it ensures fairness in pricing, providing all shareholders with up-to-date valuations of the fund’s assets.
Are all mutual funds required to use forward pricing?§
Yes, under the Investment Company Act of 1940, all mutual funds in the U.S. are required to use forward pricing.
Does forward pricing apply to exchange-traded funds (ETFs)?§
No, ETFs are priced continuously throughout the trading day on the market, unlike mutual funds.
How does forward pricing impact investors’ strategies?§
It encourages transparency and fairness by ensuring that all trade orders are executed based on the same NAV calculation, preventing any potential manipulation based on predictable price changes.
Related Terms§
- Net Asset Value (NAV): The per-share value of a mutual fund, calculated by dividing the total value of the fund’s assets by the number of outstanding shares.
- Open-End Investment Company: An investment company that continuously issues and redeems its shares at NAV and includes mutual funds.
- Mutual Fund: An investment vehicle that pools money from many investors to purchase securities and is managed by professional managers.
Online References§
Suggested Books for Further Study§
- “The Bogleheads’ Guide to Retirement Planning” by Taylor Larimore, Mel Lindauer, and Richard A. Ferri
- “Mutual Funds for Dummies” by Eric Tyson
- “A Random Walk Down Wall Street” by Burton G. Malkiel
Fundamentals of Forward Pricing: Investment Basics Quiz§
Thank you for exploring the concept of forward pricing with us and tackling the accompanying quiz. Keep striving to enhance your investment knowledge!
