What is FOB – Free On Board?

Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “FOB – Free On Board”
The FOB abbreviation is an import/export term relating to the point at which responsibility for goods passes from seller – the exporter to buyer or importer. It's in this listing because it's commonly misunderstood and also has potentially significant financial implications. FOB meant originally that the seller is liable for the goods and is responsible for all costs of transport, insurance, etc., until and including the goods being loaded at the port.
Logically FOB also meant and still means that the seller is liable for any loss or damage up to the point that the goods are loaded onto the vessel at the FOB port, and that thereafter the buyer assumes responsibility for the goods and the costs of transport and the liability. From the seller's point of view an FOB price must therefore include his costs of transport from factory or warehouse, insurance and loading, because the seller is unable to charge these costs as extras once the FOB price has been stated. The FOB expression originates particularly from the meaning that the buyer is free of liability and costs of transport up to the point that the goods are loaded on board the ship slightly different ways, even to the extent that other interpretations are placed on the acronym, most commonly 'Freight On Board ‘While liability and responsibility for goods passes from seller to buyer at the point that goods are agreed to be FOB, the FOB principle does not correlate to payment terms, which is a matter for separate negotiation. FOB is a mechanism for agreeing price and transport responsibility, not for agreeing payment terms.

By Barry Norman, Investors Trading Academy