Closed End Fund Defined

A closed end fund is a collective investment scheme that has a limited number of shares. What distinguishes a closed end fund from an open end fund is that a closed end fund does not, for the most part, issue new stock once the closed end fund begins operations. A closed end fund will also not be redeemable for cash or securities until the liquidation of the closed end fund.

Closed end funds are exchanged on secondary markets, mostly on The New York Stock Exchange but have also been traded on NASDAQ. A closed end fund is created, owned and controlled by a funds management company. The closed end fund will issue stock to investors. At the point where the stock has been completely sold off the fund will close to new investors and the closed end fund will begin operations. A closed end fund is investment scheme where all the money that is pooled into the fund is used by the funds management company to invest in stocks, bonds, and other securities. The diversification of the investment funds from a closed end fund are virtually unlimited but most closed end funds have some type of investment scheme, found in their charter, that will limit the type of securities that they may invest in.

A number of main features that distinguish a closed end fund from an open ended fund are that the closed end fund is closed to new investors once the closed end fund begins to operate. At that point the only way to get shares from a closed end fund is through exchange on a secondary market. Another distinguishing factor is that the shares trend on a stock exchange exclusively rather than redemption. Unlike an open ended fund, a closed end fund is capable of investing in unlisted securities. Also unlike open ended funds, a closed end fund is permitted to get capital through the issuance of preferred stock as well as by taking on long term debt.

Closed end funds act much like bonds in that the purchase price of the closed end fund may be lower than the face value of the closed end fund. For example, you may purchase a share of a closed end fund for $75 even though the value of the share is listed at $100. This is one of the advantages of being involved with a closed end fund. However, because of the inability of a closed end fund to seek new investors after operation it is difficult for a closed end fund to deal with difficult economic conditions or the raising of capital for new ventures.

If you are looking for closed end funds you can discus the matter with an investment broker. The most popular, and profitable, closed end funds are: Adams Express Co., Foreign & Colonial Investment, Scottish Mortgage Investment Trust, Tri-Continental Corp., and General American Investment Co.

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