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 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 >>
  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. Is it possible to buy mutual funds using a margin account?

    Because of the pricing/trading mechanisms used with mutual funds, they cannot be bought and sold like stocks. When trading ... Read Answer >>
Related Articles
  1. Investing

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
  2. Investing

    What You Need to Know About Mutual Funds

    Mutual funds are a good investment opportunity, but investors should know how they operate.
  3. Investing

    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.
  4. Financial Advisor

    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. Investing

    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.
  6. Financial Advisor

    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.
  7. Investing

    Are Mutual Funds A Relic?

    We list some options other than mutual funds for your retirement plan.
  8. Investing

    How to Choose Between Mutual Funds and ETFs

    Mutual funds and ETFs are both investment funds, but they are not as similar as you might think.
RELATED TERMS
  1. Forward Pricing

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

    Dividend payments divided by the value of a mutual fund’s shares. ...
  3. Fund Supermarkets

    An investment firm or brokerage that offers investors a wide ...
  4. No Transaction Fee Mutual Fund

    A mutual fund that is offered to investors by a brokerage firm ...
  5. Mutual Fund Liquidity Ratio

    A ratio published monthly by the Investment Company Institute ...
  6. Open-End Fund

    A type of mutual fund that does not have restrictions on the ...
Hot Definitions
  1. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  2. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  3. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  4. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  5. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  6. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
Trading Center