
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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