What is the difference between a closed-end fund and an open-end fund?

A closed-end fund has a fixed number of shares, which distinguishes it from an open-end fund. When a closed-end fund is established, it issues a specific number of shares to investors, and these shares are then traded on a stock exchange like shares of common stock. This fixed structure means that the number of shares does not change in response to demand from investors, making the market price of the shares subject to supply and demand dynamics.

In contrast, an open-end fund continuously issues and redeems shares based on investor demand, which means its total number of shares can fluctuate over time. Investors in open-end funds buy and sell shares directly with the fund at the net asset value (NAV), which is calculated daily, whereas closed-end funds trade at market prices that can differ from their NAV due to the trading dynamics on the stock exchange.

This fundamental characteristic of closed-end funds being limited in the number of shares available helps investors understand how liquidity, trading strategies, and pricing mechanisms operate in the context of different fund structures.