Open-end vs Closed-end Investment Company. Before knowing the difference there are something to be acknowledged of
Investment companies are financial institutions obtaining money from individual investors and using it to purchase financial assets like stocks, bonds etc. from the financial markets.
Investment companies are classified as
- Unit investment trusts
- Managed investment companies
Managed investment companies can further be categorized as:
- Closed-end investment companies
- Open-end investment companies.
Closed-end investment company:
A closed-end investment company issues a fixed number of shares which may be listed with a stock exchange and bought and sold like any company’s shares.
It does not stand ready to purchase its own shares whenever one of its owners decides to sell them. Shares of a closed-end investment company are traded on an organized stock exchange.
Therefore, an investor can buy or sell shares of a closed-end investment company by placing an order with the brokerage firms.
Dividend income and another form of fixed income generated by the funds are paid to the shareholders.
Eventually, most of the funds allow the reinvestment of the income and issue additional shares to the investors based on the lower of net asset value or the market price per share.
Open-end investment companies:
Commonly known as mutual funds an open-end investment company stands ready to purchase its own shares at or near net asset value. It can also offer new shares to the public for a price at or near their net asset value.
Since the capitalization of the open-end investment company is open, the number of shares outstanding changes on a daily basis.
The mutual fund’s shares can be sold to the public by either of two methods viz., direct marketing and the use of a sales force.
Under the direct marketing method, an open-end investment company can sell shares directly to investors without the involvement of a financial intermediary. Commonly known as no-load funds, the funds sell their shares at a price equal to their net asset value.
On the other hand, under the sales force method, the funds sell shares on a commission basis.
The Salesforce method involves financial intermediaries like brokerage firms, specialists, investment bankers, merchant bankers, commercial banks, insurance companies, etc.
Open-end vs Closed-end Investment Company
| Parameters |
Open-End
|
Closed-End
|
|
Outstanding Shares:
|
Always Changing
|
Remains Fixed
|
|
Public Offering:
|
Continuous
|
One-Time
|
|
Redemption Price:
|
Net Asset Value
|
Not Redeemable by Issuer
|
|
Redeemable by Issuer:
|
Yes
|
No
|
|
How Shares are Purchased:
|
Through a Dealer
|
From Another Stockholder or Dealer Inventory
|
|
Where Shares are Sold:
|
Over the Counter
|
Over the Counter or on an Exchange
|
|
Buying or Selling Costs:
|
As stated in Fund Prospectus; Sales Charge is Added to Net Asset Value to Determine the Purchase Price; No Redemption Charge
|
For Purchases and Sales; Normally a Stock Exchange Commission
|
Always Remember:
Open-End Investment Companies: An open-end investment company makes a continuous offering of its shares that are redeemable. An open-end investment company is a technical term for a mutual fund. The purchase price of a fund is the net asset value, plus any commission or sales charged.
Closed-End Investment Companies: A closed-end company makes a one-time offering of its shares that are not redeemable. It issues shares of common stock, from which capital will be raised, and builds a portfolio of securities. The purchase price is determined by supply and demand; therefore, closed-end fund shares can sell at a discount from net asset value or at a premium over net asset value.
