The Reasons for the Valuation of Closing Stock
- A mutual fund is a basket of stocks or other financial securities that you can buy shares in. When you buy shares in a fund, you own a piece of every security held inside the fund. The percentage of your ownership is determined by how many fund shares are outstanding. For example, if a mutual fund has 100 shares and you buy a single share, you own 1 percent of every asset held inside the fund.
- A mutual fund can be open-ended or closed-ended. An open-ended fund is not limited by the number of shares it can issue for sale. In other words, there is no limit to how many investors can buy shares in the fund. As new buyers buy shares, the fund gains more money that can be used by the fund to buy more shares of stock or other securities. To determine the share price of an open-ended fund, a net asset value (NAV) is calculated at the close of the trading day.
- Closed-ended funds have a fixed number of shares outstanding. Unlike an open-ended fund, the price of a closed-ended fund is determined by supply and demand, just like an individual stock. This means that they can trade at a price that is higher or lower than the total value of the stocks held inside the fund. It also means that the price of the fund can change throughout the day, which is not the case with an open-ended fund.
- The value of open-ended mutual funds is calculated at the end of the trading day. NAV is calculated by adding the closing market value of all stock shares held by the fund, subtracting all of the fund's liabilities and then dividing this number by the number of shares outstanding. The number of shares outstanding can change throughout the day, which is why an open-ended fund is priced only after the market closes.