The primary differences between closed-end funds and open-end funds lie in how they are organized and how they are bought and sold by investors. There can also be some significant differences in the investments that make up the funds' portfolios.
Open-end and closed-end investments do have several basic characteristics in common. Both are professionally managed funds that achieve diversification by investing in a collection of equities or other financial assets, rather than in a single stock. Both pool the resources of many investors to be able to invest on a larger and wider scale.
However, there are significant differences in the structure, pricing and sales of closed-end funds and open-end funds. Open-end funds (which most of us think of when we think mutual fund) are offered through a fund company that sells shares directly to investors. The number of shares is not fixed and is theoretically unlimited. The fund sells as many shares as investors wish to buy.
In contrast, a closed-end fund has a fixed number of shares offered by an investment company through an initial public offering. Thereafter, closed-end fund shares are traded on an exchange, just like an individual stock. Investors acquire fund shares by purchasing them on the exchange through a brokerage account.
The nature of each type of fund also affects how it is priced. Open-end fund prices are fixed once a day at their net-asset value. That net-asset value settlement price is the only price at which fund shares can be purchased that day. Closed-end funds trade throughout the day like individual stocks and can be bought or sold at whatever price the fund is trading at. Since market demand determines the price level for closed-end funds, fund shares typically sell either at a premium or a discount to net asset value.