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Unraveling The Mystery of Closed End Funds

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Learn About Closed End Funds

Closed End FundsClosed End Funds (CEFs), which are a type of Exchange Traded Fund (ETF), have garnered a lot attention from stock market participants in recent years; however, closed investment funds are not well understood financial products.  It is important for stock market traders and investors to understand the differences between Closed End Funds and traditional Open End Funds.

Closed End Funds represent publicly traded investment companies that invest in a variety of securities, such as stocks and bonds.  The funds initially raise capital for the funds mainly via the sale of Closed End Funds shares in an initial public offering (IPO).  The proceeds from the IPO and other revenue raising sources are invested according to the funds’ investment objectives, as outlined in the funds’ prospectuses.  Closed End Funds are referred to as “closed” because once the initial capital is raised by selling shares in Closed End Funds, there are usually no additional fund shares available from the fund sponsors.  The issuance of new shares to new investors is closed.

Closed End Funds are usually listed on major stock exchanges, such as the New York Stock Exchange (NYSE) or the NASDAQ.  Closed End Funds then trade like stocks between investors who own Closed End Funds shares and those who want to purchase Closed End Funds shares.  In the similar manner as managed mutual funds or managed Exchange Traded Funds, Closed End Funds hold a number of financial securities that are actively managed by the issuer.  The Closed End Funds’ holdings are what provide the funds an underlying value, or Net Asset Value (NAV).  The actual price that Closed End Funds trade at on a stock exchange is determined by market demand and supply forces, not the Closed End Funds’ Net Asset Value, which can at times cause distortions between what Closed End Funds are actually worth per their Net Asset Value and the value the markets assign them.

The number of outstanding shares of Closed End Funds remains relatively constant after the funds’ IPO.  Because of the lack of pressure to constantly invest funds and redeem shares, Closed End Funds are able to invest in longer term securities that are less liquid than what Open End Funds typically invest in, exposing investors to wider investment opportunities.  Closed End Funds are also designed to pay distributions, in the form of monthly or quarterly payments, which makes them ideal for income seeking investors.  Closed End Funds have low annual expenses when compared to Open End Funds, such as mutual funds, which allows investors to keep more of the money that they earn investing in the funds.

Where To Get More Information About Closed End Funds

To learn more about Closed End Funds, see CEF Connect Provides Powerful CEF Resources.  CEF Connect is a central clearing house of information about Closed End Funds, with plentiful resources that explain Closed End Funds, and provide trading and investing advice and ideas regarding Closed End Funds.

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