Understanding Closed-End Funds

What is a closed-end fund?

A closed-end fund is an investment company that has a fixed number of shares. The funds are investment companies that offer their shares through initial public offerings and typically trade, like stocks, on major exchanges. They might aim to produce income, capital gains, or some combination of the two. Unlike more common open-end mutual funds, CEFs do not issue or redeem shares continuously.

What are the advantages of closed-end funds?

Because CEFs do not continuously issue or redeem shares after their initial public offering, they often trade at discounts to their net asset value (NAV). This can be like buying a dollar for 80 cents.

What does net asset value mean?

Net asset value (NAV) refers to the net asset value of a share in a closed-end fund. To calculate NAV, you take the total fund assets and subtract total fund liabilities, then divide by the total number of shares outstanding. This is the value of the underlying holdings of the CEF, calculated on a per share basis.

Why do closed-end funds trade at a discount?

Like stocks, closed-end funds are traded on exchanges where price is determined by supply and demand. When demand exceeds supply, shares in a CEF might trade at a premium (more than their net asset value). However, supply often exceeds demand with CEFs. Therefore, shares typically trade at less than their NAV.

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