Unlike mutual funds, which constantly buy and sell shares, closed-end funds sell shares just once with an initial public offering -- IPO. After the IPO, the shares of a closed-end fund trade on the stock exchanges like shares of stock or exchange traded funds -- ETFs. The market value of a CEF share may be different than the value of fund investments represented by that share.
Closed-end funds are investment companies organized under the rules of the Investment Company Act of 1940. Mutual funds and ETFs are some other types of investment companies. Closed-end funds get the name because fund shares are sold one time to raise capital and after the IPO the fund management company does not sell any more shares or redeem shares from investors. Shares are listed on one of the stock exchanges where they are bought and sold like any other exchange-traded investment.
If a broker offers you shares of a new closed-end fund IPO, the share offer price will include fees and commissions of 4.5 to 5 percent, according to Fidelity Investments. So if you buy IPO shares of a closed-end fund, your investment will be worth about 5 percent less than your purchase amount when the shares start trading on the stock market. Closed-end fund IPOs are good for brokers -- not so good for investors.
Regular Stock Commissions
If you buy shares of an existing closed-end fund, your cost to buy shares will be the regular stock commission charged by your broker. You also pay a commission to sell closed-end fund shares. The share price of a closed-end fund will fluctuate throughout the market day, pushed by the same forces that cause stock prices to move up and down. You can buy CEF shares using the same order types -- market and limit orders -- as with stock shares.
Price vs. NAV
Each day a closed-end fund calculates its share value based on the investments owned by the fund. This value is called the net asset value -- NAV. The NAV could be viewed as the liquidation value of a CEF share. The market trading price of a closed-end fund can vary significantly from the NAV. The shares of different CEFs trade at both premiums and discounts to NAV. Websites like CEFConnect.com and the Closed End Fund Association -- CEFA -- website provide NAV data so you can look up whether a fund is trading for more or less than the shares are actually worth.
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