Discount to Net Asset Value (NAV)

What It Is:

Discount to net asset value (NAV) refers to a situation where shares of a closed-end stock fund are trading at a price lower than the fund’s net asset value per share. For example, a fund could be described as "trading 5% discount to NAV."

How It Works/Example:

Discount to NAV (and "premium to NAV") is most often used to describe the price per share of closed-end stock funds. Closed-end funds are similar to open-end funds (commonly known as "mutual funds") except for a few key differences. While shares of mutual funds are bought and sold directly from the fund company at net asset value (NAV = Market Value of All Securities Held by Fund + Cash - Liabilities), shares of closed-end funds are traded on exchanges much like stocks.

[Click here to learn how to Use Net Asset Value to Uncover Discounted Funds.]

The price per share of closed-end funds are determined solely by the market forces of supply and demand; shares rarely trade at NAV. Instead, the price of the fund is sold at a discount or a premium dictated by the open markets.

For example, shares of XYZ fund NAV have an NAV of $5.00 per share on a particular day, but they can be bought and sold for $4.90. In this case, shares would be referred to as selling “2% discount to NAV.”

Why It Matters:

One important aspect of closed-end funds is that their share price can deviate substantially from their net asset value. If the shares are trading at a higher price than the fund's NAV, they are said to be trading at a premium. Conversely, a fund with a share price lower than its NAV is said to be trading at a discount to net asset value.

Investors who trade shares of the fund have opportunities to make profits by buying shares when they are at a substantial discount (20% discount to NAV) and selling at a higher price (5% premium to NAV).