What Is It?
A closed-end fund is an investment fund that issues a fixed number of shares in an actively managed portfolio of securities. The shares are traded in the market just like stocks, but because closed-end funds represent a portfolio of securities they are very similar to a mutual fund. Unlike a mutual fund, the market price of the shares is determined by supply and demand and not by net asset value.
Closed-end funds are usually specialized in their investment focus. For example, one might concentrate its focus on a particular geographic region. They invest in stocks, bonds and other securities to gain a bit of diversification, but because they focus on one region or industry they are not diversified to the overall market. There are several hundred different closed-end funds actively traded on North American stock markets.
There are also "dual purpose" closed-end funds, which simply means that they have two classes of shareholders: preferred shareholders who receive mainly dividends as income, and common shareholders who profit from the capital appreciation of the fund's share price.
Objectives and Risks
Objectives can vary from fund to fund, so it is important to read the prospectus before investing. (To learn more, see Don't Forget To Read The Prospectus!) Some closed-end funds have capital appreciation as their primary concern, while others are more interested in income.
How to Buy or Sell It
Closed-end funds can be bought on various stock markets with the assistance of a full service or discount broker. There is no minimum number of shares to buy, and selling the funds is very easy and quick. When purchasing a closed-end fund, you are typically charged the usual brokerage commission as well as an annual management fee, usually under 1%.
|Three Main Uses
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