A:

First, remember that a stop-loss order is a limit order placed with a broker to sell a stock when it reaches a certain price. It is designed to limit an investor's loss on a stock position. Therefore, limit orders do not apply to the trading of mutual fund shares. (For related reading, see The Basics Of Order Entry.)

To better understand this circumstance, it's worthwhile to look at the structure of a mutual fund and how shares of a fund are bought and sold. Unlike stocks, which are traded on a stock exchange, mutual fund shares are issued (bought by investors from the fund) and redeemed (sold by investors to the fund) by the fund, which is why the formal designation of the most prevalent form of a mutual fund is open-end.

Fund companies issue and redeem shares of an open-end mutual fund according to the desires of the investing public. At what prices are these transactions executed? Here is where we see a fundamental difference between the trading of stock and mutual fund shares.

In the case of stock, a company issues a finite number of shares and, after an initial public offering (IPO), these shares trade on the secondary market. A stock's share price is determined by the forces of supply and demand - in other words, the market sentiment among buyers and sellers.

Mutual fund shares are priced, for both purchase and sale, according to their net asset value (NAV). How is this value determined? In simple terms, a stock mutual fund has an underlying portfolio of stocks, and these stocks are "valued" according to their closing prices at the end of each day. A mutual fund's share price, therefore, is only determined once a day after trading is closed.

Obviously, stock prices march to a different drummer and constantly change throughout the trading day. When you buy or sell mutual fund shares on a Monday, you won't get a price fix until Tuesday.

Mutual funds can't be traded like stocks, which allow investors to use techniques such as limit orders, buying on margin, shorting, etc. Because of the trading limitations of mutual funds, professional investors pressured for a change, which resulted in the creation of the now very popular exchange-traded fund (ETF). An ETF is an index mutual fund that is listed on a stock exchange and can be traded with all the attributes of a stock.

To learn more about this investment vehicle, read Introduction To Exchange-Traded Funds.

RELATED FAQS
  1. How much of a company's stock can a mutual fund own?

    There is no written rule that stipulates how much of a company a mutual fund can own. Instead, there are two major factors ... Read Answer >>
  2. Why is it that when investors realize returns on a mutual fund, its price tends to ...

    Mutual funds have been in existence since 1924, when the first open-ended mutual fund was created. Since then, the market ... Read Answer >>
  3. How do I calculate the loan-to-value ratio using Excel?

    Learn what a mutual fund and a money market fund are, and understand the differences between each and how they serve various ... Read Answer >>
  4. Why don't mutual funds trade like stocks?

    Learn how mutual funds differ from exchange-traded funds (ETFs) in how they are traded. Also, learn what fees are involved ... Read Answer >>
  5. How do you find out the price of a mutual fund?

    The easiest way to find out the price of a mutual fund is to look at its net asset value (NAV). NAV is the total value of ... Read Answer >>
  6. How do I judge a mutual fund's performance?

    Evaluate mutual fund performance utilizing resources such as Morningstar; compare the fund with others in its peer group ... Read Answer >>
Related Articles
  1. Mutual Funds & ETFs

    A Guide to Mutual Funds Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  2. Mutual Funds & ETFs

    How Mutual Funds Affect Stock Prices

    Find out how mutual fund trading activity -- and that of other institutional investors -- impacts stock prices, including both short and long-term effects.
  3. Mutual Funds & ETFs

    Trading Mutual Funds for a Living: Is It Possible?

    Find out why trading mutual funds for a living isn't your best bet, including how funds discourage short-term trading and which options may better serve you.
  4. Investing

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  5. Mutual Funds & ETFs

    5 Secrets You Didn’t Know About Mutual Funds

    Learn five of the "secrets" about mutual funds that can have a significant impact on mutual fund choices and investor profitability.
  6. Mutual Funds & ETFs

    The Benefits of Picking Mutual Funds Over Individual Stocks

    Learn about the advantages of investing in mutual funds rather than individual stocks, including the benefits of affordability, oversight and diversification.
  7. Mutual Funds & ETFs

    Mutual Funds: What Are They?

    The Definition A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money ...
  8. Investing Basics

    4 Mistakes to Avoid When Choosing Mutual Funds to Invest in

    Mutual funds are a great way to build wealth but not all of them are the same. Investors have to be mindful of fees, turnover, redundancy and performance.
  9. Investing

    How to Rate Your Mutual Fund Manager

    What to really look for when you're deciding on a mutual fund.
  10. Mutual Funds & ETFs

    The Advantages Of Mutual Funds

    Learn how to get diversification, liquidity and professional management at an affordable price.
RELATED TERMS
  1. Forward Pricing

    A Securities and Exchange Commission regulation that requires ...
  2. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  3. Exchange-Traded Mutual Funds

    Investopedia explains the definition of exchange-traded mutual ...
  4. Mutual Fund Yield

    Dividend payments divided by the value of a mutual fund’s shares. ...
  5. Open-End Fund

    A type of mutual fund that does not have restrictions on the ...
  6. Net Asset Value - NAV

    A mutual fund's price per share or exchange-traded fund's (ETF) ...
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center