For most stocks traded on major exchanges, the net asset value, or NAV, is either the same as the net liquid value -- the NLV -- or very close to it. The difference between the two is the transaction cost of selling the shares -- in most circumstances, a relatively small amount. For thinly traded shares sold only by brokers and more esoteric equities, such as mortgage-backed derivatives, the difference between NAV and NLV may be substantial, and quantifying it may be difficult.
Plain Vanilla Shares
Say you hold 100 shares of IBM. The price quoted through your broker is $180 per share, which is its NAV. When you sell the shares, you may pay a transaction fee that varies from $2 to $30. If you pay $10, the amount you realize from the sale equals $17,990. The NLV you realize upon sale is $17,990 divided by 100 shares, or $179.90 per share. The difference of 10 cents a share is minor.
Thinly Traded Shares
If you hold a very large number of thinly traded shares -- shares with low daily sales volume -- and you attempt to sell them all in a single transaction, it may move the NAV price downward. For example, you sell 20,000 shares of a stock with daily sales volume of 35,000 shares. It's likely there won't be an immediate market for them all, and they'll sell as a sequence of smaller trades. If the shares in your sell orders create an order imbalance with the shares in buy orders, the NAV will probably drop further with each trade. The average NLV from your sequence of sell orders may be several percentage points lower than the initial NAV before you began selling. NLVs of thinly traded shares may differ substantially from NAVs reported on an exchange. Closed-end funds -- mutual funds with a fixed number of shares -- may also have NLVs that differ from listed NAVs.
Certain stocks, usually smaller companies trading over the counter through a broker-dealer rather than on an exchange, may have no record of recent trades. Stocks bought and sold in these over-the-counter markets can be highly volatile. If market conditions have changed since the time of the previous sale, or if information about the company has substantially changed the market's perception of the company, any NAV information is outdated, and the NLV remains uncertain until there's an actual sale.
NLVs of Derivatives
A swap derivative is a highly leveraged agreement between two parties to periodically exchange cash flows; if the value of the first party's asset falls from a previous accounting date, then at the next accounting date, the first party pays the price difference to the second party. Determining the NAV value of a swap derivative requires a calculation of the difference in value from the previous payment date to the time of estimate. However, if the first party's asset price is trending downward substantially, it might be impossible to find someone willing to purchase the asset; in that case, the NLV price may be almost indeterminable except through an actual sale. Even if a recent sale exists, information about it may not be publicly available. Because these assets are highly leveraged, the NLV might be only a small fraction of the NAV at the previous accounting date.
- Paladyne: Hedge Fund Portfolio Pricing Best Practices
- Finance Formulas: Net Asset Value
- EMC: Addressing Daily NAV Pricing Challenges for Hedge Funds
- Securities and Exchange Commission: Valuation of Portfolio Securities and other Assets Held by Registered Investment Companies — Select Bibliography of the Division of Investment Management
- Closed-End Fund Center: Net Asset Value
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