Description

This article is from the A Guide to Closed-End Funds (CEFs).

Trading Closed-End Funds: Buying CEFs

There are two very important facts that investors tend to forget or wilfully ignore (hey, after all, I-am-smarter-than-the-other-bozos-who are-investing; these-rules-are-not-for-me syndrome):

• You will almost never find the absolute bottom. The solution is to dollar-cost average down.
• You will always pick a few duds. The solution is to diversify, never commit all your money to one position no matter how good it looks.

The temptation to ignore the above is immense, after all you can make a lot of money if you find the bottom, and you dump all your money and the position shoots up. Though you may strike lucky once or twice, the odds are not in your favor; in fact, a couple of bad losses will take you out of the trading game for ever.

The strategy then is to apportion your trading money among CEFs and step into the funds a little at a time. Usually bad news stays for 2-3 days, giving you ample time to buy. Buy the first portion of each position at the offered price (that way, you are at least in the game, given that this is a good buying opportunity). Place limit orders for the rest. Average down on the price and the relative discount, so in effect you are buying at lower prices and at better values.

Of course a lot of this depends on the capital you have available and trading costs. If you trade often but have limited capital you may have to compromise a little on the diversification and averaging down; otherwise your trading costs will be high. Try to find a good deep-discount broker to keep costs low.

 

Continue to:

• prev: Trading Closed-End Funds: Selecting Candidate CEFs
• Index
• next: Trading Closed-End Funds: Selling

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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