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CEF Liquidity




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

CEF Liquidity

The large majority of CEFs trade on the NYSE and, for most, liquidity is not a problem for the small investor. However, a few CEFs are fairly illiquid---trading, at an average, only a few hundred shares daily. If liquidity is a concern, then the investor should avoid such funds. The reason is obvious: if the investor wants to unwind a large position (relative to the average daily number of shares traded) in a short time, he will affect the quotes, and will probably depress the prices. For an investor in mutual funds, except for rare cases, liquidity is not a concern: when he wants to sell or buy, he will be able to do so at the NAV.

For the savvy CEF investor, liquidity should not pose a problem. Occasionally, it may create additional opportunities. For example, during adverse market conditions, illiquid CEFs tend to trade at remarkable discounts, as investors stampede to sell, continually depressing the prices. A mark of an intelligent investor is to profit from such stampedes: buy when the crowd sells, sell when the crowd buys. Professional investors will rarely take positions in such funds, leaving the field clear for the individual investor.

 

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