Investor Trading

The open-end company is one which issues and sells its shares and which stands ready to redeem them at any time at a price which approximates the new asset value. Since shares are being continually bought and sold, the open-end companies appraise their shares twice daily. As it requires some sort of sales organization or distributor to sell the shares, it is easily seen that the selling price must include this expense in some form as a charge over and above the net asset value; this amounts to approximately 6 to 9 per cent and is commonly called the “loading charge,” although there are a very few funds which do not make such a charge.
Many heated arguments are fostered by the use of this “loading charge” and some investment counselors maintain that this “eats up” the earnings for the first few years and that the investor receives nothing as an immediate return from his investment; they add that ordinary listed stocks of good quality may be bought at a much lower cost and will yield some immediate return. There is much truth in such an assertion, but the mutual-fund boosters point out that the surcharge is really a payment for management, which latter is the very reason why the investor is purchasing the open-end shares in the first place.
Open-end funds may well be classified according to type, since each attempts to achieve a certain objective:
The bond fund, as the name indicates, invests its funds entirely in a portfolio of bonds, usually of good grade; such a fund is characterized as being quite conservative since safety of principal is the main objective, which entails a low rate of return. Examples: Keystone Custodian Bl (high grade) and B2 (medium grade), Bond Fund of Boston, Manhattan Bond Fund, Group Securities General Bond Fund.
The balanced fund is one which maintains a goodly portion of its resources in bonds and/or preferred stocks and places the remainder in common stocks. The former commitments are defensive and conservative, and their proportion is usually varied within certain limits depending upon the judgment of the management. The balanced fund is considered by many as a good compromise between strong conservatism and rather considerable speculation. Examples: Eaton and Howard Balanced; Scudder, Stevens and Clark Balanced; Boston Fund; Wellington Fund.
The diversified common stock fund comprises the largest group in total membership. All invest in common stocks, but there is a wide degree of difference in the approach. Some specialize in “blue chips,” some specialize in growth stocks, some confine themselves to low-priced shares, some stress certain industries, such as chemicals or petroleum; still others may stress a certain business segment and the possibilities of growth within it (e.g., electronics). Examples: Axe-Houghton Stock Fund, Broad Street Investing Corp., Commonwealth Stock Fund, Loomis-Sayles Mutual Fund, Science and Nuclear Fund.
We may note that the chief purpose of many funds is income; for others, capital appreciation; and for still others a bit of both.

Investment companies are usually corporations, although a few are Massachusetts trusts. All final decisions regarding policy, purchase and sale o£ portfolio securities, research, declaration of dividends, etc., rest with the directors or trustees, as the case may be. Sometimes the advice and research portion may be handled by an investment counsel firm under contract, by which all such advice and research are furnished for a stated fee. Even management may be handled on a contract basis, since there are firms which make a business of doing this work. It may be remarked that the use of subcontracting is a means of reducing expenses and this is now quite common practice.
Much may be said as to the classification of investment companies. For our purposes it will be sufficient first to set forth the characteristics of two broad types, afterward showing the subheadings within each. These two are the closed-end company and the open-end company.

THE CLOSED-END COMPANY
The closed-end company is one that has a specific amount of capital and whose securities resemble those of any other business corporation (bonds, preferred and common stocks); its business is rather unusual since it deals exclusively in the securities of other corporations for income and for profit. The shares of closed-end companies are usually common stocks, bought and sold through the stock exchanges or the over-the-counter market. Stockholders in a closed-end company are able to sell their shares for what they will bring at any time, just as the shares of other corporations are traded daily. Examples: Carriers and General, National Aviation, Petroleum Corporation of America, Tri-Continental, United Corporation, Adams Express, Lehman Corporation. The term “closed-end company” refers to the limitation placed upon the number of shares issued, which may then be bought and sold only from the existing stockholders. In contrast, the open-end fund both sells and repurchases its own shares.
From the investor’s point of view, the most interesting thing about closed-end shares is the manner by which they are priced. Being traded on an established market, such as the New York Stock Exchange, the shares are priced entirely upon a supply and demand basis, as is the case with the shares of any ordinary business corporation. As a result, the shares of many closed-end companies are often available at a discount from their net asset value, so that dividends may become quite attractive and opportunities for profits often present themselves.
While the capitalization of a closed-end company is relatively simple, such as common stock alone, the price at the market place will usually reflect the supply and demand for the particular stock; but where the capital structure is more complicated, as in the case where both bonds and common stock are outstanding, another factor enters into the price. This is called “leverage” and has been discussed in a previous chapter, which indicated that it may afford a rather large prospective gain in good times, especially with a rising market, but also may wipe out all gains in poor times and a falling market. The extent of leverage in any case will depend upon the capital structure, but the lesson is quite clear: avoid leverage shares! They do not represent investment, but speculation—and the investor of limited means, as we have so often remarked before, cannot afford to speculate.