What is Net Asset Value?

Net Asset Value (or NAV) used as the primary metric to judge the size of an investment portfolio. This is expressed in dollars (or in several other currencies) and represents cash that will recover if all portfolio holdings liquidated at the current market price. In the case of a stock portfolio if the portfolio holds a long and short position, the long position has a positive value and the short position has a negative value, so the net must be taken to arrive at the actual size of the portfolio.

The formula is:

NAV = All Old Stock Values ​​- Value of All Short Shares + Cash (1)

Here are some useful observations about NAV:

  1. The NAV does not change Short Buy or Sell or Sell transactions. If you ignore the commission, it is. When you buy shares, you exchange cash with an amount equivalent to shares which according to formula (1) do not change the NAV. Likewise, when you sell short stocks, you give stock but receive the same amount of cash so keeping the NAV intact.
  2. The NAV only changes in one of two ways: 1) the stock price saved in account changes; 2) additional cash deposited or withdrawn from the account. With no deposit or withdrawal, observing changes in the NAV can only be explained by fluctuations in stock prices. Each is an easy way to calculate portfolio profits for a certain period, for example, a month or a year:

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

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

Formulas are quite precise but straightforward, or you need to calculate the profitability of each holding, which is a more involved process.

One more caveat: in the case of margin accounts, you can use loan funds to finance stock purchases, each formula (1) needs to be slightly clarified:

NAV = Value of All Old Shares – Value of All Short Shares + Net Cash (3)

Here, Net Cash is positive if you have your cash balance, or negative if you have borrowed some funds from your broker. But equation (3) does not change the two observations about the NAV we have made above.

One final note: if you use a kind of trading simulator to practice trading it is crucial to track your NAV or portfolio and how it changes over time, not just looking at your trade list individually.