Introduction - Net Asset Value (NAV)
It is useful to understand some of the common terms associated with investment companies, funds and REITs. Understanding these terms provides insight into how the investments work and how to evaluate them.
Net Asset Value (NAV)
Investment vehicles such as mutual funds, REITS and exchange-traded funds, hold multiple underlying investments, including stocks, bonds, real estate and other assets. When the total value of these assets is added up, liabilities are subtracted and the remaining number is divided by the number of outstanding shares; the resulting value is referred to as the net asset value (NAV). The NAV represents the per-share price investors would spend to purchase a single share of the investment.
NAV per share is computed once a day for open-end mutual funds, based on the closing market prices of the securities in the fund's portfolio. Buy and sell orders are processed at the NAV of the trade date; however, investors must wait until the following day to get the trade price. Because ETFs and closed-end funds trade like stocks, their shares trade at market value, which can be a dollar value above (trading at a premium) or below (trading at a discount) NAV.
Because many pooled investment vehicles pay out virtually all of their income and capital gains, changes in NAV are not the best gauge of mutual fund performance, which is best measured by annual total return.
SEE: Capital Gains Tax 101