Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
simply traded in a stock exchange, and depending on demand, the share prices move up and down just like other stocks.
While a closed-end fund's share value is determined by its trading activity, in most cases its NAV is also available for investors to examine. After all, a closed-end fund has a portfolio just like an open-end fund which can be used to calculate its NAV. This may sometimes create a confusion as to which figure truly represents a closed-end fund's share value, its share price or its NAV. In this case, NAV represents the true value of the closed-end fund, while its share price represents the actual trading value. As you may imagine, the NAV and the share price of a closed-end fund are usually very close to each other, especially when you look at their average values over the long haul. However at any given instance, these values might be (however slightly) different from each other.Why? A closed-end fund that has become popular may end up with a higher per share price than its NAV as demand for it increases. In this case the fund is said to be trading at a premium. On the other hand a closed-end fund with little demand may see its share price slip below its NAV. In this case the fund is trading at a discount. By nature, closed-end funds are a double-edged sword. While their NAVs do affect their share prices, the supply and demand equation can work to the advantage or disadvantage of the investors. At times, a closed-end fund's share price may continue to rise even as its NAV falls. Other times the reverse could happen. It all depends on the investors' perception of the fund.
Many closed-end funds are bond funds, also known as fixed-income funds, as they pay monthly dividends to their investors derived from the coupon payments (see the Bonds chapter). This not only allows investors to invest in bonds by trading them like stocks (through the closed-end fund), it also gives them better per share return if interest rates fall or are believed to be ready to fall. This is because at these times …
Table of Contents