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Discount - to sell below value.

The amount bonds sell below face value. The amount closed-end companies often sell below the believed net-assets-value of the funds portfolio. Bonds or closed-end companies selling at a discount, are selling closer to the true liquidation value of the assets.

Sometimes before the end of a month or the end of a quarter you may see prices in mutual funds rise for no apparent reason, just to come back down again the next day. This is because, before the close a few different funds that hold the same securities in large amounts, send orders to the floor in the closing moment to bid up the price of that last 100 shares.

Their fees are figured on this price, so taking a loss on a few shares to make all the share’s look more valuable is just good business. If a mutual fund was to liquidate all of these shares at the price that they say it is worth on the close of that quarter, at the very least they could not receive that much for the fund, because they would pay themselves fees to do it. Unless it is an extremely rare case, They cannot sell all of their holdings without upsetting the balance of demand and supply pushing the prices lower with greater supply.

So this closing value cannot possibly be the liquidation value of the whole fund on the close of any period. But this is the price that they list for the value of the whole fund. What is called a discount on closed-end companies takes this into account.

If you owned a small number of something, it would liquidate at closer to the last price. But because you are buying into a much bigger pool. That pool if it sold its greater supply of shares in a company would get a lower market price. The market price for the larger amount of stock is usually lower than for a small amount of stock. These lower prices are reflected in the discount that close-end funds often sell.

Investors that think the NAV is important will find this an advantage when they are accumulating these types of funds. But in general you buy it at a price, and hope to sell at a higher price, no matter what the NAV really is.

Funds that make direct placements in companies before they go public have no way of knowing what the net-assets value is. Investors cannot depend on the discount as an indicator because the net-assets value is not known.

There are strategies where endowments like Harvard University, will buy deep discounted closed-end companies and sell short the stock in them. Long the fund at a discount, short the stocks at the market. If the fund goes down they make out on the shorts. If the discount narrows the gain more on the funds than they lose on the shorts.

Speculators may by closed-end companies trading at a discount to get control and then open-end them to get out without the discount.

Speculators may also buy the fund with the intent to force liquidation, as was done recently with Temit in England. They only forced partial liquidation. But the raiders bought at a discount and got out at the market.

Deep discount funds can become take over targets because of the leverage an buyer can get. Like when Warren Buffet took over Source capital. He bought control with a small percentage, forced the minority holders out, and then used all the assets in the fund to go buy something bigger.


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