What Is A Discount?
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The discount is the amount by which the share price is lower than net asset value, expressed as a percentage. In plain terms, it is a measure of the popularity of an investment company.
Shares in investment companies often trade at a price different from the value of the underlying net assets. If the net asset value per share is higher than the share price, an NAV discount is said to exist. If the NAV is lower than the share price, the shares are said to trade at a premium to NAV. Shares in less popular investment companies trade at a discount to NAV. Popular investment companies’ shares trade at a premium. Likewise, if expectations are that the company will do well in future, the shares are likely to trade at a premium to NAV. If the opposite is true, a NAV discount is likely.
The price of shares in any quoted company, like the price of apples or tomatoes, is determined by supply and demand. On the supply side, the number of investment company shares is usually fixed. If the supply of shares exceeds demand, the price is likely to fall to a NAV discount. If demand exceeds supply, the market price of shares is likely to be at a premium above NAV.
Investment companies worry more about their popularity than most companies. If an investment company trades at a big discount to the value of its assets for some time, large numbers of shares could be bought with the aggressive intention of winding the company up. After all, a profit will come to an investor who buys at a discount and sells at or near net asset value. Persistent wide discounts therefore pose a danger to the survival of an investment company and are a big reason why investment companies are concerned with their popularity.
Bargains
Investment companies trading on wide discounts may look like bargains but this can be misleading. There is often a good reason for the discount.
Big premiums can be problematic too. If investors lose faith in a popular investment company, the premium can quickly turn into a discount. This will make it look as though the investment company is doing badly and could trigger more selling.
Discounts that swing around too much can also be dangerous. Investors might catch the swing right, buying at a wide discount and selling at a narrow one. However, more commonly investors get sucked into buying a fund because it is popular and then get disheartened and sell when it is unpopular.
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FAQs
The discount is the amount by which the share price is lower than net asset value, expressed as a percentage. In plain terms, it is a measure of the popularity of an investment company. Shares in investment companies often trade at a price different from the value of the underlying net assets.
What does a discount to NAV mean? ›
A discount to net asset value refers to when the market price of a mutual fund or ETF is trading below its net asset value (NAV). A discount to NAV is most often driven by a bearish outlook on the securities in a fund.
Why do REITs trade at a discount to NAV? ›
According to the noise theory, fluctuations in departures from NAV are caused by changes in investor sentiment. That is, when investors become (irrationally) pessimistic about REITs, the value of REIT shares is pushed below their true, underlying value.
What does it mean if a stock is trading at a discount? ›
What Is At a Discount? "At a discount" is a phrase used to describe the practice of selling stocks, or other securities, below their current market value, similar to a sale of goods at a retail establishment.
How do you calculate a discount to NAV? ›
How is Premium/Discount to NAV Calculated? The calculation involves comparing the ETF's market price per share to its NAV per share, and then expressing the difference as a percentage of NAV.
Why do companies trade at a discount to NAV? ›
The price of shares in any quoted company, like the price of apples or tomatoes, is determined by supply and demand. On the supply side, the number of investment company shares is usually fixed. If the supply of shares exceeds demand, the price is likely to fall to a NAV discount.
Can an ETF trade at a discount to NAV? ›
Since market prices are ruled by supply and demand, an ETF's market price can diverge from its NAV. If there's heavy demand from buyers, the price of an ETF can increase above its NAV (a premium). Conversely, if there's heavy sell-side pressure, the price can dip below the NAV (a discount).
Do you buy or sell at NAV? ›
Mutual fund net asset value (NAV) represents a fund's per share market value. It is the price at which investors buy (bid price) fund shares from a fund company and sell them (redemption price) to a fund company.
Should I invest more when NAV is low? ›
The notion that a Mutual Fund's performance is inversely related to its NAV is a misconception. NAV is simply the per unit value of the fund and it does not reflect its quality or potential. For example, a fund with an NAV of Rs 22 is not necessarily superior or inferior to one with an NAV of Rs 85.
What does NAV mean for REITs? ›
Key Takeaways. One of the best ways to analyze real estate investment trust (REITs) is with net asset value (NAV).
What is a Premium or Discount to NAV? A premium or discount to the NAV occurs when the market price of an ETF rises above or below its NAV. If the market price is higher than the NAV, the ETF is said to be trading at a premium. If the price is lower, it is trading at a discount.
What is the difference between discount and trade discount? ›
The primary difference between a cash discount and a trade discount is that a cash discount is offered by the seller on invoice price, while a trade discount is offered by the supplier to a reseller on the catalogue price of the product.
What is a good discount rate for stocks? ›
An equity discount rate range of 12% to 20%, give or take, is likely to be considered reasonable in a business valuation. This is about in line with the long-term anticipated returns quoted to private equity investors, which makes sense, because a business valuation is an equity interest in a privately held company.
Is a discount to NAV a good thing? ›
If investment trust shares are trading at a discount to NAV it can give the impression that the shares are cheap because the fund isn't worth investing in. Although this isn't always the case, boards don't want investors to be put off by a discount that is too wide.
What does 5% discount to the NAV mean? ›
Definition of NAV discount: A nav discount is when the market price of a fund is lower than its NAV. For example, if a fund has a NAV of $10 and is trading at $9 per share, it has a NAV discount of 10%. Conversely, a NAV premium is when the market price is higher than the NAV.
What is an example of a discount to NAV? ›
For example, a fund trading at a price of $18 per share with a $20 NAV is said to be trading at a 10% discount. If the fund's market price is $21 per share, it's trading at a 5% premium to NAV.
Is less NAV good or bad? ›
The notion that a Mutual Fund's performance is inversely related to its NAV is a misconception. NAV is simply the per unit value of the fund and it does not reflect its quality or potential. For example, a fund with an NAV of Rs 22 is not necessarily superior or inferior to one with an NAV of Rs 85.
What is the meaning of NAV%? ›
Net Asset Value is the net value of an investment fund's assets less its liabilities, divided by the number of shares outstanding. NAV is commonly used as a per-share value calculated for a mutual fund or ETF.
What does NAV tell you? ›
NAV stands for net asset value. In finance, it is used to evaluate the value of a firm or an investment fund by subtracting its liabilities from assets.
