What is the Open-End Effect?

by Investing School on April 16, 2012

There are several ways to invest your money. One of the lesser known ways to invest is with companies which offer an open-end effect. The difference between traditional stocks and open end investments is the way stocks are presented. Open-ended investment companies have no limits upon their size. If more people invest in the stock then the fund’s assets go up. If people pull their money out, the assets decrease proportionately. Such a fund’s value and size can change dramatically even over the course of one day.

As a result the company must buy and sell its investments to accommodate fluctuations that occur as people increase or decrease their support of the fund. This is a difficult situation for the investor as transactions occur constantly and cost the investor in transaction costs. Of those funds which qualify as open-ended investment companies (OEIC) some are income units which pay you a dividend and others are accumulations units which reinvest dividends.

Mutual funds are prime examples of open ended funds. Typically they continuously buy and sell fund shares offering a flexible and useful investing mechanism for those involved. Occasionally, when fund assets become too large to be handled effectively the fund may be closed to new investors or even closed to any new investment, even by current owners. The decision to halt sales, in one way or another is a result of what may be called the open-end effect. The value of shares has become too diluted as a result of market conditions and needs to be shored up.

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