Net Asset Value (NAV)

NAV is the method with which mutual fund shares are valued or priced at the end of each trading day. We're making up the composition of a mutual fund. It has 1,470 shares of GOOG and 300 shares of AMZN and 500 shares of IBM and well, you get the idea.

At the end of each day, the ask prices in the bid ask spread, i.e. the ask is the price at which somebody will sell these shares are added up. Yep, total’d. In this case there are 114 different names in the portfolio and $7 million bucks in cash, all of which total 82.3 million dollars in value at the end of the day.

There are 2 million shareholders, exactly, at this moment. So the NAV at today's close? Well, it's $82.3M divided by 2 million, or $41.15 per share. That $41.15 is the NAV of the mutual fund.

And what happens when more investors join? Like let’s say somebody invests a million dollars at the end of today, well, then the fund goes from having 7 million bucks in cash to 8 million.

And that investor just bought one million divided by $41.15 per NAV share, so that the mutual fund company printed out of thin air an incremental 24,301 shares, bringing its total to 2,024,301.

The total value of the fund is now $83.3M from the $82.3M yesterday, and the shares outstanding are now 2,024,301. Yeah, the NAV didn’t change...just the shares outstanding.