Exchange-traded funds have revolutionized the investing world, giving investors a chance to gain exposure to a wide variety of different types of investments. Yet ETFs and similar funds have certain quirks you need to understand. One has to do with the difference between net asset value, or NAV, and market value. Although you might expect these two numbers to be the same, in practice they can differ greatly -- and when they do, it can give you an opportunity to profit.

Understanding NAV and market value
The net asset value of a fund is a simple concept to understand. If you add up the total value of a fund's assets and divide it by the number of shares outstanding, you'll get the fund's net asset value per share. In rare cases, it might be difficult to determine a fixed value for a particular asset that a fund holds, but generally, figuring out the NAV of a fund is a trivial exercise that professional traders do constantly throughout the trading day.

By contrast, market value is determined by traders in the financial markets. Ordinarily, market participants take their cues from the actual value of a fund's assets, so you won't find a big disparity between NAV and market value. Moreover, with most ETFs allowing institutional investors to buy or sell large blocks of ETF shares at or near net asset value, there would be ample opportunity for arbitrage if the market value were too far removed from NAV.

Why differences persist
Some situations nevertheless lead to continuing spreads between NAV and market value. The most common situation occurs when the assets an ETF holds trade primarily on a different exchange that happens to be closed when the exchange on which the ETF trades is open. For instance, international ETFs often hold shares of foreign stocks in different time zones. Technically, the net asset value typically reflects the closing price of the ETF's holdings on their home exchange. Global markets constantly shift, and that can lead to an apparent discrepancy between market value and NAV -- at least until the foreign stock exchange opens the next day and closes the gap.

The other main scenario involving premiums or discounts to net asset value occurs with a special type of fund known as a closed-end fund. Unlike most ETFs, closed-end funds have a limited number of shares outstanding, and thus supply and demand plays a key role in determining the market price of shares. When a particular asset class is highly popular, closed-end funds that hold such assets can trade at a huge premium to net asset value. If that asset falls out of favor, then the fund can fall to a large discount to NAV.

The key for investors to understand is that with ETFs, it rarely makes sense to pay more than the net asset value of shares. If the market value of an ETF falls, and you can therefore buy shares at a discount to NAV, it can often give you a good opportunity to get a bargain.

Now that you're learning more about stocks, you may want to start investing today. Check out The Motley Fool's Broker Center to find the best broker for you.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at Thanks -- and Fool on!