Mutual Funds (more info)

A mutual fund is continuously offering its shares for sale. There is no limit to the number of shares it may offer, although it may choose to limit the number itself. Most, however, do make continuous offerings. In addition, the fund is always "open" to redeem the shares it has sold if a shareholder requests that it do so. The mutual fund is required by law to redeem its shares if requested.

These shares are said to represent an undivided interest in the investment portfolio. That is, a single investor does not own all of any one security, but owns a part of every security in the portfolio.

A closed-end company, on the other hand, offers a fixed number of shares. Once those shares have been purchased, additional shares are not offered, at least for a period of time. This is more closely related to the offerings of any other business corporation.

Closed-end shares are bought, sold and traded on the open market, just as corporate securities are.
Shareholders may trade with each other directly or on an exchange or OTC. Unlike a mutual fund, however, the closed-end investment company will not redeem its shares. There is no legal requirement that it do so.

An investor who wishes to purchase shares of a closed-end investment company follows essentially the same procedure that is involved in purchasing any other stock. That is, the investor will go through a broker or dealer, paying the current market price for the closed-end investment company shares, plus a commission.

To sell the shares, the investor will receive the current market price at the time of the sale.

Determining the cost to purchase shares of a mutual fund is slightly more complex. First, two different figures are involved in arriving at the selling price. These are the net asset value (NAV) and the public offering price.

The NAV of a mutual fund is determined at least once each business day. It is the fund's total assets minus its total liabilities. To determine the NAV per share, then, this total NAV is divided by the number of shares outstanding.
The NAV is sometimes called the BID price. This is the price the fund will pay a shareholder who wishes to redeem shares. Now, mutual fund share prices do not respond to stock market changes as do regular stock and closed-end shares. Instead, the company uses the NAV as indicated to determine its value for redemption.

In addition, to determine the price at which shares will be offered to the public, it is common for a sales load to be added to the NAV, resulting in the ASKED or OFFER price.

Some mutual funds are known as no-load funds. This means that no sales charge is made when shares are purchased. These funds sell their shares directly, usually by mail, so there is no dealer or sales representative commission to pay.

However, no-load funds may charge a redemption fee when the investor wants to sell the shares back to the investment company. Sales charges and other fees must be fully explained to the potential investor before any purchase is made.