Which of the following best describes the nature of a closed-end fund?

Which of the following best describes the nature of a closed-end fund?

• A. It issues an unlimited number of shares
• B. Shares can be sold at any time to the issuer
• C. Investors purchase shares on the secondary market
• D. They are always priced at NAV

Answer: (C)

A closed-end fund is characterized primarily by the way its shares are bought and sold. Investors purchase shares of a closed-end fund on the secondary market, rather than directly from the fund itself. This means the shares are traded among investors, and the price is determined by market demand and supply, which can result in prices above or below the net asset value (NAV) of the fund's assets. This structure contrasts with open-end funds, where shares are created and redeemed directly with the issuer at the NAV price on a daily basis. The mechanics of closed-end funds contribute to their unique pricing dynamics. Because shares trade on secondary markets, they may not reflect the NAV at any given time, allowing for the potential of investors to buy shares at a premium or discount to NAV based on market conditions, investor sentiment, and liquidity factors. Understanding this dynamic is crucial when evaluating investments in closed-end funds, as it influences both the purchasing strategy and the potential returns for investors.

A closed-end fund is characterized primarily by the way its shares are bought and sold. Investors purchase shares of a closed-end fund on the secondary market, rather than directly from the fund itself. This means the shares are traded among investors, and the price is determined by market demand and supply, which can result in prices above or below the net asset value (NAV) of the fund's assets. This structure contrasts with open-end funds, where shares are created and redeemed directly with the issuer at the NAV price on a daily basis.

The mechanics of closed-end funds contribute to their unique pricing dynamics. Because shares trade on secondary markets, they may not reflect the NAV at any given time, allowing for the potential of investors to buy shares at a premium or discount to NAV based on market conditions, investor sentiment, and liquidity factors.

Understanding this dynamic is crucial when evaluating investments in closed-end funds, as it influences both the purchasing strategy and the potential returns for investors.