Description

This article is from the A Guide to Closed-End Funds (CEFs).

Investing in Closed-End Funds: Placing an Order

Once you have established your brokerage account and have deposited sufficient funds in the account, you are ready to buy and sell CEFs. As we mentioned earlier, one of the key advantages of investing in CEFs over mutual funds is the ability to control the time and price at which you buy the shares. Before you can do that, you need to be aware of what quotes are and what options are available to you when you place orders to buy and sell.

A quote consists of two prices: a bid and an asked. The bid is the highest price someone is willing to pay for a share of the CEF and the asked is the lowest price someone is willing to sell a share of the CEF at. The difference between the two is called the spread. Technically, the quote is supposed to hold for 100 shares. That is, if you place an order to buy 100 shares of the CEF at the asked price, and assuming that the quote doesn't change in the process of placing the order, you will be sold those 100 shares.

Often, the broker will be able to tell you the size of the bid and asked, that is, how many shares are offered at the asked price, and how many shares are bid at the bid price. For example, a CEF quoted as $10 - $10 1/8, 50 X 100, indicates that 5000 shares are bid at $10 and 10,000 shares are offered at $10 1/8. The spread in this case is 1/8. The size is useful to know when placing large orders that may change the quote.

There are many types of orders:

Market Order

A market order is an instruction to buy or sell the CEF at the next available price. Usually, the execution is immediate and at the asked price. If the order is larger than the number of shares offered at the asked price, some shares will be purchased at a higher price.

When the size of the order is substantially larger than the number of shares offered at the asked price, and the trading volume of the CEF is low, some shares may be purchased at much higher prices. Be careful when you place market orders.

Limit Order

A limit order is an instruction to buy or sell the CEF at a specific limit price. These types of orders implicitly mean "or better". That is you instruct your broker to buy shares at the limit price or better (that is below the limit price) and sell shares at the limit or better (that is above the limit price). In no case, will you buy above the limit price or sell under the limit price.

Day Order or Good Till Canceled Order

A day order instructs the broker to buy or sell shares on the business day the order was placed. The order automatically expires at the close of business on that day. A good-till-canceled-order is valid until explicitly canceled (some brokers specify a perior, e.g., 30 days during which the order is valid).

All or none Order

An all-or-none order instructs the broker to buy all the shares you requested or none or to sell all the shares you requested or none, that is, partial fulfillment is not desired. This restriction is useful when you want to save commissions as may be the case when an order is partially filled over several days, with commissions separately calculated for the transactions on each day. The disadvantage is that the CEF may trade at or below your buy price (and, vice versa, for your sell price), and you may not receive an execution because the shares in each trade were less than the size of your order.

There are other types of orders that you should be aware of: stop orders, stop limit orders, do-not-reduce orders, fill-or-kill orders, etc., which will hopefully be explained in the literature sent by the brokerage firm to you.

 

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