A closed end fund company is an investment company that follows a collective investment scheme by releasing limited number of shares in the market. Closed end fund companies are also called closed end companies in the US and are considered as one of the three basic types of investment companies.
It�s very rare to find a closed end company issuing new shares after the launch of fund. The closed end fund shares are not redeemable in nature for cash or securities until the liquidation of the fund. Generally an investor who wants to invest in a closed end fund company can buy the shares on a secondary market from a broker, other investor or from the market makers.
This is contradictory to the open end fund company functionality where all transactions involve the fund company creating new shares available in the market or redeeming shares.
The price of shares in a closed end fund company is determined by the investments of the company in the market and also on the premium that is placed on it by the market.
The Net Asset Value (NAV) of a closed end fund is calculated by dividing total value of all the securities in the fund by the number of shares in the fund. The market price of a fund share may be either higher or lower than the NAV and when the fund�s share price is lower than NAV, it is said to be selling at a discount while when it is higher, it is said to be selling at a premium to the NAV.
The major global stock exchanges are the place where the closed end fund shares are traded. Just like the open ended funds, the closed ended funds are also generally sponsored by a funds management company that controls the measures on how the money should be invested in the market. The closed end fund companies normally collect money from the investors in an initial offering which may be either public or limited and the investors are given their shares according to their initial investment in the fund. The fund�s charter governs the actions of the fund charter in a closed end fund company and the fund may invest in stocks, bonds or in other instruments in the market.
Last Updated on : 22th July 2013