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Current time:0:00Total duration:4:52

Video transcript

in the last video we had Pete starting an open-ended mutual fund that was managed by Pete Inc and mutual funds normally have nice you know grand names maybe they call this the Saturn fund and if there is a Saturn fund out there I just picked that name at random I'm not implying that this is you or anything like that or you know something like the Galileo funder or saw anything like that who knows I'm sure there's probably as a Galileo fund so once again don't sue me I just made up that name on the fly but it's managed by Pete incorporated and we called it an open-ended fund because at any time one of the people who own a share or a unit in the fund can redeem it back from the fund that Pete or the management company would say okay if you want if you want at the end of that video your $180 back we'll buy that will give you $180 you give back the share and then we cancel the share and if anyone wants to add to the fund if they want to invest the corporation can create new shares and then issue it to people and sell it to people and then that their money will go into the common pool and the management company would take fees off of it but that probably had you asking well if this is an open-ended fund what is a closed-end fund or do they even exist and they do that's what I'm going to talk about here closed closed and funds and closed-end funds on some level are a little bit simpler what happens in a closed-end fund is that the all of the investors are essentially or I guess you could say that the the share structure is locked in right from the beginning so if Pete wanted to start a closed-end mutual fund he would once again register corporation with the SEC he would market it he would tell everyone hey I'm Pete I'm an awesome investor here's my track record and then he would just get a bunch of investors so let's say he's able to find 20 investors and that's all he's able to find so this is 20 right here and I'm not going to count but let's say there's 20 slices right over he gets 20 people so let's say they each get $100 though or they each give $100 so he is able to raise $2,000 so 20 times 100 so he is able to raise $2,000 and once that happens the fund is closed Pete's going to do his best to manage this so Pete will manage this and he will still take a management fee may be the same 1% but what's fundamentally different here and he can mark well he doesn't have to market the fund anymore because he he can no longer get new investors and this is actually the main difference an open-ended mutual fund at any point in time or I should say at the end of trading at the end of a day they can lose investors or they can gain investor so it's an incentive for an open-ended fund to constantly market itself because the manager wants to manage more money so that he gets more of a management fee and a closed-end fund they'll market it right when they're creating the fund but once they created so let's say over here he just got his 20 investors then it is closed he can't get any more he can't create any more shares or cancel any more shares but what can happen so you might say well oh and the closing fund how do these people let's say that you're holding one of these shares let's say you're holding one share right over here what happens if you want to if you need a buy a house or I don't know you owe money to somebody so you you want to get the value of your share back and the answer with a closed-end fund is that you would then go sell your share to someone else so this right here you can trade it you can trade it and you trade it just like you would trade the stock of any company in fact when you go and buy or sell a share of IBM most of the time you're just buying or selling it from someone else you're not transacting with IBM the company you trade it in the secondary market you're not dealing with the actual corporation and so that's where the investor gets their liquidity and when we say liquidity it allows them to convert it into cash - because they can trade it so the big difference open-ended fund when an investor wants their money back they have to kind of commute they have to deal with the fund itself the fund will buy back their share if someone wants to invest in a fund the fund will sell them the share so they're always dealing with the fund itself and a closed-end fund once the fund is created its share pool is fixed and if someone wants to buy or sell a share it happens in the secondary markets they're buying and selling from each other they're not dealing with the actual fund manager the disadvantage from the fund manager here is it's much less flexible in terms of going or shrinking the fund the advantage is this fund manager doesn't have to keep cash around in case in case the shareholders want to redeem in the open-ended fund we saw that the manager has to keep some cash around in case one of the investors wants their money back here the closed-end fund he knows that no one can get their money back right here so he can just did it he or she can invest as they see fit