What is Premium to Net Asset Value (NAV)?

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

How Does Premium to Net Asset Value (NAV) Work?

Premium to NAV (and 'discount 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 $5.10. In this case, shares would be referred to as selling “2% premium to NAV.”

Why Does Premium to Net Asset Value (NAV) Matter?

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).