What is NAV (Net Asset Value)?

At one point in your investing experience you'll likely wonder what is NAV. As I pointed out in the heading above, NAV stands for Net Asset Value.

Net Asset Value is an investment company's (as defined by the SEC) assets minus liabilities, divided by the number of shares outstanding.

These invesment companies put together a portfolio of multiple investments into one such as stocks, bonds, mutual funds, index funds and etf's.

Typically you'll come across NAV when researching mutual funds, closed-end funds or certain Trust's, with the most common being the mutual funds or closed-end funds.

The Sec requires mutual funds to have their NAV re-calculated once per day and it is typcially done at the end of the regular trading session. If you place an order to buy OR sell shares of a mutual fund during the day, your order will be executed based on the "next" NAV which will be calculated after the day's close. This can mean a difference of several percentage points from one day to the next.

As an example for the calculation of the NAV, if the total value of a mutual fund is $10,000,000 with 1,000,000 shares outstanding, the NAV per share would be $10,000,000 divided by 1,000,000= NAV of $10.00 per share. (assuming zero liabilities in our example)

If more people sell shares the next trading day and the total number of shares is now 900,000, then the new NAV would be: $10,000,000 divided by 900,000= NAV of $9.00 per share. (also assuming zero liabilities in our example)

Another way the NAV can change is when the value of the individual components of the mutual fund itself change, thus causing a change in the funds total NAV also.

If you're still following up to here, great, there's a twist in understanding what is NAV: most of the above ir referenced using mutual funds. The NAV of closed-end funds are calcualted the same way, but closed-end-funds trade in the open market during the day like stocks do, at the market price. Meaning, what ever people are willing to pay, not the actual NAV.

here's a chart displaying the price performance of a closed-end fund caompared with it's own NAV over the same time period:

What is NAV

You may hear that a fund is trading at a discount or premium to it's NAV, this would be on a closed-end fund. Keep in mind that just because a closed-end fund is trading at a discount to it's NAV doesn't necessarily mean it's a good buy. You should research and understand WHY it's trading at a discount before making any investment decisions.

A good website to learn more about closed-end funds and their respective NAV prices is http://www.cefconnect.com/

Return From "What is NAV" To "Stock Trading Terms"

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