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Answer:
Dear
Sam,
Common
wisdom is that you should not buy a closed-end fund
at its Initial Public Offering (IPO).
A
while back, the SEC did a three-year study of the
topic and found that on average, closed-end funds
dropped sharply in price immediately after the public
offering.
The
study indicated that the funds fell an average of
15.1% during the first 120 trading days.
The
drop is not necessarily an indication that the fund
is not a good investment. Rather, part of this initial
drop reflects the money that had to be used to pay
the underwriters -- those who brought the fund public
in the first place.
My
recommendation: That you wait at least 120 trading
days after the fund goes public, then re-evaluate
its performance and at that time make your decision.
About
Closed-End Funds
Closed-end
funds, like open-end funds, hold a basket of stocks
and are managed by an investment company. That's where
the similarity ends.
Open-end
funds, known to the public as mutual funds (such as
those offered by Fidelity, T. Rowe Price, etc.), continually
sell new shares and redeem any and all shares investors
wish to sell. Both buying and selling of shares takes
place at net asset value (NAV). Click here
to read a prior column on NAV.
Closed-end
funds, on the other hand, sell only a set number of
shares at the initial public offering. Once all these
shares are sold, the fund is officially closed (thus
its name) and new investment money is not accepted.
Closed-end
funds, unlike open-end funds, trade on the stock exchanges.
That means their prices per share fluctuate, based
on supply and demand, just as with regular stocks.
They can and do trade above or below their net asset
value -- in other words at a premium or discount.
You
can read more on Open
End Funds and Closed-End
Funds in these previous columns. For a list
of closed-end funds offered here at BUYandHOLD, simply
Click
here.
Good
luck!
BUYandHOLD
does not recommend any securities. The securities
mentioned above are being used for illustrative purposes
only and should not be regarded as an offer to sell
or as a solicitation of an offer to buy.
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