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What Is Buying Forward?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 April 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Buying forward is a type of investment approach or strategy that calls for purchasing assets at a set price now, with the expectation of being able to sell those same assets at a higher price later on. This type of strategy is often used in forex trading, allowing an investor to acquire currency at current rates of exchange, holding the currency for a time that may be no more than a few hours, then selling that currency for a profit. The same general approach can be used with other types of assets, including commodities and stocks. As long as there is reason to believe the purchased asset will be worth more within a reasonable period of time, the investor can be said to be buying forward.

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One of the easiest ways to understand how buying forward works is to consider the investment activity that occurs in a foreign exchange or forex market. Currency trading is typically fast paced, with the rate of exchange capable of shifting within a matter of a few moments. For investors who know the market well, it is possible to identify a currency that is not trading well at the moment, but is anticipated to begin increasing in value due to upcoming events taking place within the economy. With this in mind, the investor will purchase the currency, hold it until the rate of exchange improves, then sell it just before the rate begins to go flat and begin dropping again. When executed properly, the investor can earn substantial returns by using this buying forward strategy.

The same general concept of buying forward works with the acquisition of commodities. The buyer uses resources on hand to lock in the best possible price for the commodities, in hopes of being able to sell them at a later date for a higher price. Assuming the market for those commodities is high on the delivery date associated with the transaction, and the investor has lined up a buyer willing to pay current market prices, a profit is generated. There is some risk involved, since the demand for the commodities may not be as great as originally anticipated, meaning the investor will have to settle for a lower price when reselling the asset at or after the delivery date associated with the original acquisition.

Managing a buying forward scheme may involve committing a portion of the investor’s financial resources, or by choosing to buy on margin, using a margin account supplied by a broker or dealer. With the latter, the investor still is liable for any losses that may result from short-selling the acquired assets for less than the original purchase price, but also has the benefit of not tying up other financial resources during the period of ownership. Under the best of circumstances, the buying forward strategy results in being able to cover the original purchase plus acquiring some additional profits on the deal. This makes it possible to settle the outstanding balance in the margin account and use the returns in the pursuit of the investor’s financial goals.

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