What are Closed-End Funds

Closed-end funds issue a fixed number of shares that are traded on the stock exchange or OTC market. When the shares are sold, the fund does not issue more shares. These funds have professional managers who assemble and manage the investment portfolios according to the goals and objectives of the funds. Unlike open-end funds, closed-end funds do not trade at their net asset values (NAVs). Instead, their share prices are based on the supply of and demand for their funds and other fundamental factors. Consequently, closed-end funds can trade at premiums or discounts to their NAVs as shown in Table 15–2. Closed-end fund prices can be obtained from financial newspapers or from Web sites on the Internet.

Table 15-2
Closed-End Fund Premiums and Discounts


Shares of closed-end funds are bought and sold through brokers. You should be aware of the following facts about the purchase of closed-end funds:
* Brokerage firms underwrite and sell newly issued shares of closed-end funds.
* The brokerage fees on these newly issued shares can be quite high, which then erodes the price of the shares when they trade on the market. For example, if a closed-end fund sells 1 million shares at $10 per share and there is a brokerage commission of 7 percent, the fund receives $9.3 million to invest ($700,000 is deducted from the $10 million proceeds). The share price drops in value from the $10 originally paid and trades at a discount to the offer price.
* Another reason not to buy newly issued shares in a closedend fund is that the portfolio of investments has not yet been constituted, so investors do not know what the investment assets are and, in the case of bond funds, the yields on those investments.

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