Investment Funds
Mutual funds are the most popular way for investors to particpate in both stock and bond investing. A fund is a pool of money which reflects the total assets invested in the fund. The fund manager or management team has discretion over how the assets are government so long as it is in line with the terms of the prospectus. Most mutual funds are registered under the Investment Company Act of 1940 and trade on an exchange once per day after the close of the regular markets. The per share value of the fund (net asset value or NAV) is calculated each day by totaling the value of all the investments and dividing the number of outstanding shares. Since these funds offer an unlimited number of shares, creating them as they are bought and erasing them as they are sold, they are referred to as open end mutual funds. These funds always trade at their NAV, unless there is a front-end sales load charge assessed, which is a rarity these days.
Closed End Funds on the other hand offer a set amount of shares at the beginning of the life of the fund in a process similar to a initial public stock offering. Once this number of shares is set, they trade intraday on an exchange, where their NAV and their market price are often different. Since they trade throughout the day, the market price of the shares can be higher (sometimes much higher) than the actual NAV value of the shares. This may happen when investors favor a particular investment sector and rush into the shares. Since no new shares are created, the price goes up to accomodate the buyers. The NAV, however, remains the same.
If a closed end fund is trading above its NAV, it is trading at a premium. If it trades below its NAV, it trades at a discount.
US specific funds:
Mutual Funds Exchange-traded Funds
