So, you just heard about closed end funds and you're wondering if they're for you. I got your back!
There are lots of different funds on the market you can buy shares in. Looking at your portfolio, it may be hard to know what to invest in next!
But only one thing matters in choosing where to put your money: What will earn you more money later.
The short explanation for these funds is “funds that have a cap on the number of potential shareholders.” But there’s a bit more to it than that.
Closed end funds provide income through dividends just like other types. But their major perk is that they have a cap on the number of people who can own shares in their fund.
If only 1,000 people can invest in them, then only those people can invest in them. That applies no matter how much or how little that fund is worth.
What does this mean?
To start, those shares are traded more like stocks than those in an open fund.
Their value can go up and down according to supply and demand and investment in the fund at large.
Closed end funds can be great for people who are newer to investing. These funds can all center around one theme or industry (cannabis, technology, etc.) and are curated by someone with expertise.
If you’re new to the sector, why not follow the advice of an expert? This is also a great way for people to get involved in an industry they care about even if they don’t have a lot of knowledge about the stock scene within it.
Closed end funds may be easier to understand for someone new to learning the forces behind the stock market.
With an open-end fund, more money coming in means that more potential shares can be issued.
But why not have fewer shares that are of higher value? Especially if they’re more likely to rise in value if the market allows it.
I should mention that these funds are also a great way to invest in super-famous stocks (and benefit from their success) for a much lower price.
It all depends on what’s in the fund.
If Amazon and local government assets are in a fund, why not jump in?
The exact thing that makes closed end funds appealing is also what can make them infuriating: The number of people owning stocks cannot ever change.
This means that the fund’s value can at times be very stunted. It depends more heavily on direct investment.
If they can’t take on more investors, that’s one less force potential force earning you money.
This also means that what people think a share is worth may be very different than the actual worth of the fund.
Think of every overvalued social media stock that later plummeted in price when people learned that the company didn’t have a plan for future growth. (Or for battling Russian bot farms).
If someone doesn’t like investing in funds in general (compared to stand-alone stocks), then working within a closed end fund won’t be any different.
It can feel like less control!
So if you’d rather have control over your funds from beginning to end, best stay away from these.
Speaking of control: Closed end funds are also maintained by an investment advisor pulling the strings.
Not comfortable with someone else picking what goes into your portfolio? Stay away!
As always, please talk to your broker and take caution before investing in a closed end fund. Not every fund works for every person!
My picks are based on past performance and the variety of shares within the fund. Understandably, a good ratio of more risky vs. less risky will lead to more even profits over time. But there are always exceptions to the rules.
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