What is a Closed-End Fund?
A closed-end fund is a publicly traded investment company that invests in a variety of securities, such as stocks and bonds. According to the fund's investment objectives, the fund raises capital primarily through an initial public offering (IPO). "Closed" refers to the fact that, once the capital is raised, there are typically no more shares available from the fund sponsor and the issuance of new shares is closed to investors.
After the IPO, most closed-end funds are listed on a national exchange such as the New York Stock Exchange (NYSE) or the NASDAQ. There the fund's shares are purchased and sold in transactions with other investors, not with the sponsor company itself.
The typical closed-end fund strategy represents an actively managed selection of holdings. These investments in securities collectively add up to a value, known as its Net Asset Value (NAV), that may be different from the fund's market price. The market price is determined by market demand and supply, not the fund's net asset value.
Since most closed-end funds offer regular monthly or quarterly distributions, demand is often related to both the distribution amount and the NAV performance of a fund.
Although the outstanding shares of a closed-end fund remain relatively constant, additional shares can be created through secondary offerings, rights offerings or the issuance of shares for dividend reinvestment.