What is a characteristic of an open-end investment company?
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A. B. C. D. E.E
Open-end investment companies (mutual funds) sell additional shares of the fund at the NAV, with or without sales charge, or redeem shares at the NAV, with or without redemption fees.
An open-end investment company, also known as a mutual fund, is a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, or money market instruments. It is regulated by the Securities and Exchange Commission (SEC) in the United States.
The characteristic of an open-end investment company can be identified by evaluating each of the given options:
A. NAV is based on current market prices: The Net Asset Value (NAV) of a mutual fund represents the per-share value of the fund's assets minus its liabilities. It is calculated by dividing the total value of the fund's assets by the number of outstanding shares. The NAV is typically calculated at the end of each trading day based on the closing prices of the securities held in the fund's portfolio.
B. Its stock trades on the regular secondary market: Open-end investment companies do not have individual stocks that trade on the secondary market. Instead, they issue shares directly to investors at the current NAV. Investors can buy or sell shares at the NAV price by transacting directly with the mutual fund company or through authorized intermediaries.
C. Its market price is determined by supply and demand: Unlike closed-end investment companies, which have a fixed number of shares traded on secondary markets, open-end investment companies do not have a market price determined by supply and demand. Instead, the price at which investors can buy or sell shares is based on the NAV of the fund.
D. The NAV is computed twice daily: While the NAV of open-end investment companies is typically calculated once a day, usually at the end of the trading day, it is not computed twice daily. This option does not accurately describe the characteristic of an open-end investment company.
E. It continues to repurchase and sell shares: One of the defining characteristics of an open-end investment company is that it continues to repurchase and sell shares to investors at the current NAV price. This means that investors can buy shares from the fund or sell their existing shares back to the fund at the prevailing NAV. The fund stands ready to issue or redeem shares as investors enter or exit the fund, respectively.
Based on the given options, the characteristic of an open-end investment company is best described by option E: "It continues to repurchase and sell shares." This characteristic distinguishes open-end investment companies from closed-end funds, where shares trade at a premium or discount to their net asset value on secondary markets.