Closed-end investment companies are similar to mutual funds in that they offer investors a managed portfolio of securities in which to invest. Unlike mutual funds, however, investors buy shares of closed-end funds just as they do any other security because closed-ends trade on exchanges. Therefore, they buy and sell these shares through their brokerage accounts, paying regular brokerage commissions.

Unlike open-end funds, closed-end funds have no redemption privileges. You can't sell the shares back to the company as you can with mutual funds. Instead, you must sell them to another investor, exactly as you would your shares of Cisco or IBM. This means that each closed-end fund has a current market price that reflects what investors are willing to pay for the shares—in short, a price determined by the supply and demand for the shares.

The interesting thing about closed-end funds is that although the net asset value (NAV) is (typically) calculated every day, closed-ends sell on exchanges and therefore are worth whatever investors will pay for them.Traditionally, virtually all closed-ends have sold at discounts or premiums at almost every point in time, meaning that the market price is different from the NAV. If the market price of a closed-end fund is below the NAV, the fund is selling at a discount. If the market price is above the NAV, the fund is selling at a premium.

Many funds regularly sell at discounts. This does mean that you can, in effect, buy the portfolio of securities at a discount (because you are paying less than the NAV); it does not mean you are assured of making money by doing so. When you sell your shares, the discount may have widened. The expense ratio for the closed-end fund can have a significant impact, and may be directly associated with the size of the discount; that is, the larger the expense ratio for a closed-end fund, the larger the discount is likely to be.

Investors have several choices among closed-ends when it comes to investing objectives. Domestic closed-end equity funds have objectives such as growth, growth and income, balance (stocks and bonds), and specialized objectives involving particular industry sectors. There are also international equity funds. Bond funds can also be divided into domestic funds (which may specialize in Treasuries or municipals) and foreign funds.

Closed-end funds remain a very small part of the overall investment company business. At year end 2000, total assets for closed-ends only amounted to $135 billion, a small number compared to the $7 trillion of assets in mutual funds. There are approximately 525 closed-end funds today, compared to some 7,000 mutual funds

Like mutual funds, closed-end funds are regulated under the Investment Company Act of 1940 and are subject to Securities and Exchange Commission (SEC) registration and regulation. As for mutual funds, numerous requirements are imposed for the protection of investors.

Closed-end funds are an alternative to mutual funds for investors, as both are simply different forms of an investment company with similar objectives and operating procedures.