Author Topic: How do Funds Set Their Price/Share?  (Read 630 times)

D Bopp

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How do Funds Set Their Price/Share?
« on: May 03, 2017, 10:27:24 AM »
Random question, but how do mutual funds set their price per share?  Do they have set number of shares available to purchase, like individual stocks? Seems like most investors of mutual funds hold more than trade, unlike individual stocks.  I don't ever see mutual funds splitting their share prices. Or maybe I'm just not seeing the ones that do.
 Just curious.

dandarc

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Re: How do Funds Set Their Price/Share?
« Reply #1 on: May 03, 2017, 10:44:51 AM »
Open ended mutual funds (VTSAX is a popular example) create and destroy shares as needed due to cash flows.  Price is at Net Asset Value at the end of each trading day.  So that price quoted is exactly what the basket of securities and cash that the mutual fund holds was worth at the end of the day.  If you order more shares before close of market, you'll be buying the mutual fund at its price at the end of the day.

Closed ended mutual funds have a fixed number of shares and those trade like stocks.  Unless you get in on the IPO, the price you pay could be more or less than than the Net Asset value.

Exchange Traded funds are very similar to closed ended funds in that they trade like stocks (may technically be closed-ended funds).  However, a select few arbitrageurs are allowed to swap ETF shares for the underlying assets or vice-versa.  This arbitrage mechanism keeps the price of the ETF close to the NAV of the underlying securities at all times, assuming there is sufficient liquidity in the market.

D Bopp

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Re: How do Funds Set Their Price/Share?
« Reply #2 on: May 03, 2017, 11:00:58 AM »
Thank you!  It's very interesting.