There are two principal types of investment companies: open-end and closed-end.
Open-end funds (more commonly known as mutual funds) continuously offer their shares to investors and prospective investors and stand ready to redeem their shares at all times. Transactions in shares of mutual funds are based on their net asset value (NAV), determined at the close of each business day. Sometimes the transaction price includes an adjustment for a sales, redemption or other charge. NAV is the value of the fund's assets less its liabilities divided by the number of the fund's outstanding shares. The invested capital in a mutual fund tends to fluctuate based on investor sentiment.
Closed-end funds have a fixed number of shares outstanding. Following an initial public offering, their shares are traded on an exchange between investors. Transactions in shares of closed-end funds are based on their market price as determined by the forces of supply and demand in the marketplace. Interestingly, the price of a CEF may be above (at a premium to) or below (at a discount to) it's NAV. The transaction price will also include a customary brokerage charge. The invested capital in a closed-end fund is fixed and will change only at the direction of management. Capital can be increased through the issuance of shares in conjunction with a rights offering or through the reinvestment of certain dividend payments. Capital can be reduced when shares of the fund are repurchased in conjunction with a stock repurchase program or tender offer.
