3.2.  Management Companies: Closed-End Funds

Like open-end funds (mutual funds), closed-end management companies offer shares of a fund made up of a portfolio of securities. Unlike open-end funds, however, closed-end funds raise capital through an initial public offering (IPO), after which they no longer issue new shares. Closed-end funds also differ from mutual funds in that they can be traded on the secondary market like a stock. For this reason, we say that shares of closed-end funds are negotiable, since their ownership can be transferred across individuals.

Closed-end funds purchased during an IPO are not subject to sales loads, but the broker will usually charge a commission on the trade. Since they are sold only once by the investment company, closed-end funds do not incur the ongoing cost of creating and redeeming shares, and they typically have lower expense ratios than open-end funds. Because of its fixed nature, the closed-end fund structure gives the portfolio manager freedom to maintain a long-term strategy. The fund can hold positions through market declines because it does not need to sell securities frequently to mai