What is Netting out?

Netting out is a term used to describe the process of earning a clear profit. Clear or net profit is achieved when all expenses associated with the purchase and sale of an asset have been accounted for, and there is a return left over after those expenses are settled in full. Also known as bringing in a net, the term is also used to describe the process of managing the transfer of funds so that those transfers are reduced to a single net amount. The transfer may involve transactions between a parent company and its subsidiaries, or two or more separate companies.

Investors engage in netting out each time a profit is earned on an asset. For example, if an investor purchases a thousand shares of stock for a price of $10 US dollars (USD), holds them for two months, then sells those shares at $20 USD, he or she will clear some amount of net profit. The amount of that net profit is determined by allowing for both the purchase price of the shares and any fees or other expenses that were involved in the acquisition and ultimate sale of those shares.

Reaching and maintaining a healthy profit margin is the goal of any investor. By looking closely at the actual return generated from investment activity, and comparing it to the expense involved in making those trades, it is possible to determine how much netting out is taking place. This is not always readily apparent simply from comparing the purchase and sale prices associated with securities. Depending on what the return that is gained by selling acquired securities, there may or many not be a clear profit. In situations where the investor essentially breaks even, after allowing for broker and similar fees, there is no true netting out, since no true net profit was obtained.

The concept of netting out can also be applied when a business is being liquidated. In this scenario, the process is often referred to as close-out netting. The idea is to settle all the contracted liabilities of the business through the liquidator, issuing a single payment rather than a series of payments to each of the vendors. The liquidator then undertakes the task of settling all the open accounts associated with the company. This approach typically makes it possible to settle the obligations well before their actual due dates. In the event that this particular process is not implemented, then the company settles each individual debt on or before the actual due date.