What Is a Closed-End Fund?
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What Is a Closed-End Fund?
A closed-end fund is an investment company that buys a fixed amount of capital and issues a fixed number of shares. It collects money from investors to invest in a variety of securities; this mix may change over time. The shares of closed-end funds trade on market exchanges such as the New York Stock Exchange. They are also referred to as exchange-traded funds.
Things To Know
- A closed-end fund issues a fixed number of shares of the portfolio for sale to the public.
- No new money goes into a closed-end fund, aside from dividends and capital gains.
A closed-end fund is a diversified portfolio of investments managed by a professional portfolio manager. The fund may be charged trading commissions and management fees. A closed-end fund issues a fixed number of shares of the portfolio for sale to the public. This means that to buy shares of a closed-end fund, you usually have to find someone who already has them and is willing to sell them to you.
How prices are determined
Mutual fund share prices are determined by changes to the overall market for the securities held by the funds. Closed-end fund share prices are determined mostly by supply and demand for the funds themselves. If only a few shares are available and many people want them, the price of the shares increases.
What "closed" means
No new money goes into a closed-end fund unless dividends and capital gains are not distributed to shareholders. This creates a more stable cash flow, giving closed-end fund managers the freedom to make proactive rather than reactive investment decisions.
A closed-end fund is NOT a traditional mutual fund that is closed to new investors.
Some other advantages of closed-end funds
Closed-end funds also have more freedom to invest in riskier and less liquid securities than most mutual funds because they do not redeem shares to meet investors’ desire for cash. Like mutual funds, closed-end funds pay out some of their earnings to shareholders in the form of dividends. Dividends are a way of sharing profits with shareholders. Though dividends can be used to purchase additional shares on the secondary market, as they are available, they cannot be reinvested back into the funds for additional shares. There are a fixed number of shares instead of a continuous offering, as occurs with open-end funds (mutual funds).