Description
This article is from the A Guide to
Closed-End Funds (CEFs).
Closed-End Funds and Mutual Funds
Most investors are familiar with mutual funds. CEFs are like mutual
funds in many respects. Both are investment companies: they pool money
from investors to buy securities. An investor buys into a fund by
purchasing shares of the fund. His expectation is that the fund will
perform well, and he will be able to sell his shares at a higher
price, thereby, realizing a profit on his investment.
For small investors, mutual funds and CEFs offer attractive
benefits:
- Diversification.
- An important risk in investing in a single company is the
possibility that the company goes bankrupt, and the shares held in
that company become worthless. Most mutual funds eliminate this risk
through diversification: they invest in many companies, industries,
and markets. Even funds that invest in a particular sector of the
economy are reasonably diversified within that sector. For individual
investors, achieving similar diversification involves building a
portfolio of stocks, and ensuring that they are not strongly
interdependent. Many small investors lack the funds to achieve
reasonable diversification.
- Professional Management.
- The funds are managed by portfolio managers, assisted by a team
of analysts who research the companies, industries and markets in
which the funds invest. Such managers, presumably, have years of
experience and knowledge. Few individual investors can match the time
and effort put in by professionals whose full-time job is to track
their investments and seek new investments.
- Economy of Scale.
- The costs of buying and selling securities in large quantities is
considerably less than in small quantities. In addition, bookkeeping,
tax calculations and other activities can be simplified for the small
investor.
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CEFs, closed-end fund, premium, discount, volatility, trading, investing, leverage, yields, buying, selling, shares, money, funds, mutual funds, adventages, disadvantages, liquidity, commissions, brokers, source, information, reference
