net asset value

Understand what is the net asset value?

Net asset value (NAV) is used to evaluate the size of an investment portfolio as a key metric in finance. It is expressed as dollars (or other currencies) and represents the money that will be recovered when all portfolio investments are liquid at current market value. In the case of stock portfolios where the portfolio has long and short positions, long positions have a positive value and short positions have a negative value, so a net is needed to reach the actual size of the portfolio. 

Net asset value (NAV) is the value of an entity’s assets that subtract the value of its liabilities, often compared to open-ended or mutual funds, because the shares of such funds are registered with the United States and their net asset value, the Securities and Exchange Commission shall be redeemed.

The NAV formula is: NAV = Value of All Long Stocks – Value of All Short Stocks + money (1)

Here are some useful observations on NAV:

NAV does not change when you forget the commission when buying or selling low transactions. You exchange money for the same amount of stocks that do not change the NAV according to equation (1) when purchasing shares. Similarly, when you sell small stocks, you give the stock out or earn cash in exchange for the same quantities so that the NAV remains intact.

By dividing the total net assets by the total units issued, we calculate the NAV of a mutual fund. To obtain the total net assets of a fund, minus any liabilities from the current value of the assets of the mutual fund and then divide this figure by the total number of outstanding units.

The NAV changes only in one of two ways: 1) the price of shares held in account changes; 2) Additional cash deposited or withdrawn from the account. Changes in NAV can only be explained by fluctuations in stock prices in the absence of deposits or withdrawals. An easy way to calculate portfolio gains for a given period, for example, a month or a year. 

Profit % = (NAV2 – NAV1) * 100% / NAV2 (2)

Where NAV1, NAV at the beginning of the period, NAV2, NAV at the end of the period.

The formula is straightforward but accurate; alternatively, you have to calculate a profit for each holding, which is a very involved process.

Another caveat: In case of a margin account, you can use the borrowed amount for stock purchase; Formula (1) should be explained a bit:

NAV = Value of all long stocks – Value of all short shares + Net money (3).

If you have your cash balance, then the net cash is positive here, or negative If you borrow any fund from your broker, Nevertheless, formula (3) does not change the two NAV observations we made earlier.

One final note: if you are using some trading simulator to practice trading, keep an eye on the NAV and your portfolio and how it changes over time, not your trading list is individually.

Similar Posts

Leave a Reply

Your email address will not be published.