Which is a characteristic of an open-end investment company?
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A. B. C. D. E.E
When buying or selling shares of an open-end fund, an investor pays or receives the net asset value price of the fund plus or minus any possible loads.
An open-end investment company, also known as a mutual fund, is a type of investment vehicle that pools money from various investors and invests it in a diversified portfolio of securities such as stocks, bonds, or other assets. The characteristic of an open-end investment company is as follows:
E. You receive the NAV price of any share sales.
The Net Asset Value (NAV) is the per-share value of the mutual fund's assets minus its liabilities. It represents the underlying value of the mutual fund's portfolio. When an investor wants to buy or sell shares of an open-end investment company, they transact at the NAV price.
Unlike closed-end funds, which have a fixed number of shares that trade on secondary markets like stock exchanges (Answer B), open-end investment companies do not have a fixed number of shares. They continuously issue and redeem shares based on investor demand. This is why they are referred to as "open-end" because they can create new shares as investors buy in and redeem shares as investors sell out.
Option A, "sells shares at a discount to NAV," is incorrect. Open-end investment companies typically sell shares at the NAV price, not at a discount. Investors pay the NAV per share when buying into the fund and receive the NAV per share when selling their holdings.
Option C, "sells no further shares," is incorrect. Open-end investment companies can continuously sell shares to new investors as long as there is demand.
Option D, "the market price of its shares is determined by supply and demand," is partially correct, but not the most accurate answer. While it is true that supply and demand dynamics can influence the price of open-end investment company shares, the primary mechanism for buying and selling shares is based on the NAV price, not on market price.
Therefore, the most accurate characteristic of an open-end investment company is option E, "you receive the NAV price of any share sales." This reflects the fact that investors transact at the NAV price when buying or selling shares of the mutual fund.