Forward pricing is a method used by investment companies to price shares of open-ended mutual funds based on the net asset value (NAV) after receiving an order. Late trading, allowing investors to receive the previous day’s share price after the pricing time has elapsed, is illegal in some countries.
Forward pricing is a common stock pricing method used by investment companies and funds that buy and sell shares of open-ended mutual funds. In a forward pricing agreement, a mutual fund typically prices its shares according to the net asset value (NAV) of the shares after receiving an order to buy or sell the shares. In general, a fund sets the net asset value of its shares daily, after the major stock exchanges close.
Forward pricing occurs because the net asset value of open-end mutual fund shares is typically recalculated after the stock market closes on a trading day. If an order to buy mutual fund shares is placed after the fund’s NAV pricing time has elapsed, the fund cannot price the order at the previous day’s NAV. As a result, the fund typically participates in forward pricing and sells the shares based on the next day’s net asset value.
For example, suppose that an open-end mutual fund calculates its NAV at 4:00 pm Eastern Standard Time (EST), as is common for most such funds. If an investor purchases shares in that fund before 4:00 pm ET, the investor will receive that day’s net asset value price for the share. However, if the investor purchases shares of the fund after 4:00 pm ET, the investor will receive the next day’s net value price for the shares.
In some markets, investment companies are required by law to use forward prices. For example, in the United States, the Securities and Exchange Commission (SEC) requires investment companies, underwriters, and distributors to use forward pricing agreements when buying or selling shares in a mutual fund. open. Failure to use a forward price contract can result in significant civil and criminal penalties for a fund.
Late trading is the practice of allowing investors to receive the previous day’s share price after a fund’s pricing time has elapsed. This practice is illegal in some countries. For example, suppose a favorite shopper places an order after 4:00 pm EST, fund time. If the mutual fund manager gives the buyer the calculated share price before 4:00 pm EST, he or she will engage in late trading. Late trading can give late traders the opportunity to capitalize on events that occur after pricing time at the expense of long-term fund investors. Participation in late trading is often viewed as a breach of a fund manager’s fiduciary duties to the fund and its shareholders.
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