What Is a Closed-End Fund?


Quick Answer

A closed-end fund is a diversified, professionally managed investment that is similar to an individual stock. The price of a closed-end fund is determined by supply and demand, and new shares are only issued at the time of the initial public offering.

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Full Answer

A closed-end fund is composed of individual stocks, bonds, or a combination of the two. They are traded on an exchange or over-the-counter, and are sometimes formed to hold illiquid investments that are difficult to manage in a mutual fund.

When purchasing a closed-end fund, an investor pays the current market value. This value is demand-driven and is not dependent on the underlying value of the securities that are owned within the fund. The managers of a closed-end fund are paid a fee for the management of the investment. Closed-end fund managers are allowed to use borrowed capital, known as leverage, in an effort to enhance performance.

When buying or selling a closed-end fund, an investor is likely to pay a brokerage commission since they trade in the same manner as an individual stock. As they are exchange-traded, closed-end funds can be bought or sold at any time the exchange is open. Closed-end funds are regulated by the Securities and Exchange Commission, and they are required to distribute capital gains and dividends to shareholders.

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