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The value of the shares of an open-end mutual fund is readily determined. Each day, the accounting staff of a fund simply adds up the value of all the securities in the portfolio, adds in other assets, deducts liabilities, and comes up with a net overall value. It is then a simple matter to divide the net assets by the number of shares outstanding. This is called the net asset value, and is the price at which investors buy and sell shares from the fund. The net asset value is listed in the financial section of many major newspapers.

How it Works. Let's look at a simplified example. Suppose we start a brand-new fund, the We Fly Higher Stock Fund.

On its first day of operation, the We Fly Higher Stock Fund (which I'll refer to as WFHSF, for short) receives $100 from John Smith. At $10.00 per share, Mr. Smith receives ten shares. (At the start, the fund's starting share price-in this case, $10.00 per share -- is arbitrary and set by the Fund.) The result of the transaction? The assets of the Fund are $100 in cash, and there are ten shares outstanding. Divide $100 in assets by 10 shares to get $10.00 per share.

On day two, WFHSF buys two shares of Amalgamated Fish & Chips, a seafood and technology company, for $50 each. We still have a per share value in WFHSF of $10.00, because the total assets of the fund are still worth $100 (2 shares of Amalgamated at $50.00 each), and there are still ten shares of the fund outstanding. However, from this point on, the share value in the Fund will vary, and will no longer be arbitrary. Federal regulations require a daily re-valuation process, called marking-to-market, of all open-end mutual funds. Marking to market refers to adjusting the per-share price of the fund to reflect changes in the Fund's portfolio, or asset, value. In this way, investors know the true value of their investments on a daily basis, and as new investors buy into, and sell out of, the Fund, everyone gets a fair shake. With that in mind, let's see how the fluctuations in daily share prices occur, as we continue to follow the fortunes of the We Fly Higher Stock Fund.

On day three, mercury contamination (resulting from improper disposal of chip-manufacturing by-products) is found in Amalgamated's fish, and the bad news spreads rapidly. Fearing the worst, investors flock to sell Amalgamated shares, and the price of its stock plunges 50%, from $50 to $25 per share. Of course, back at the Fund, the assets have declined, too, because the Fund's assets are entirely in Amalgamated stock. The two shares the Fund holds have declined to $25 per share, as noted, and now are worth a sum total of $50. The accounting department at the Fund calculates the new value per share of the Fund by adding up all the assets, now $50.00, and dividing by ten (the number of shares outstanding), and note that each share of the Fund is now worth only $5.00. This is called the net asset value (per share is implied).