To be a successful investor, you need a sound financial plan that includes your income, your obligations, how much time you have before retirement and how you handle risk. You also need a basic understanding of the types of investments you are putting your money into, because investments jargon can be confusing. When your broker uses terms like stock price and NAV, it helps to know what she is talking about.
Stock price refers to the market price at which a particular stock is trading at a particular time. The term can be a bit confusing because there are a number of different ways a stock's price is reported. Stock price can refer to the closing price from the previous day; the bid price, which is the price an investor is currently offering to pay for the stock; the ask price, which is the price a stockholder is currently willing to sell the stock for; and the 52-week high/low price, which is the price range the stock has traded for during the past year.
Stock Price Considerations
A stock's market price is not just a factor of figuring out how much a company is worth and dividing that figure by the number of outstanding shares of stock. Stock price is driven by emotion as well as logic. It can be influenced by rising inflation or fears of rising inflation. Stock prices might react to changes in monetary policy or the result of national elections. Stock prices can fluctuate based on an influential analyst's recommendations or on positive or negative news about the company.
NAV is an acronym for net asset value, a term used to describe the value of a mutual fund. A mutual fund holds a variety of securities, which might include stocks, bonds, bank certificates of deposit and government securities. All of the securities in the fund usually have different market prices. Since each share of the mutual fund represents equal ownership in every security within the mutual fund, a method had to be developed to describe the value of each mutual fund share. Each share's NAV is determined by subtracting the mutual fund's liabilities from its assets and dividing the remainder by the number of outstanding shares.
Mutual Fund Considerations
A mutual fund's net asset value does not fluctuate throughout the trading day the way an individual stock's price does. Mutual funds typically figure their net asset value once per day, after the markets close. Because the market price of the securities held by the mutual fund fluctuate each day, the mutual fund's net asset value will usually fluctuate on a daily basis. All mutual fund shares purchased and redeemed on a particular day are based on that day's NAV.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.