Using The Prospectus To Determine Net Asset

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The precise method of determining the net asset value of each share of stock and its offering price is often set forth clearly in the prospectus of open-end companies. In most instances, open-end companies have chosen at the start to fix the capitalization so that distribution is effected at a low price per share, merely on the assumption that the investor prefers to have a substantial number of shares for each $100 invested.

This tendency was more common in the early thirties than in recent years. It will be observed that the load is computed in two ways: in relation to the net asset value and in terms of the offering price itself.

The net asset value is usually determined by valuing the securities at the last sales price if such sales price can be determined or by the last bid price or at the mean of the closing bid and asked prices. Ordinarily, the board of directors has discretion to establish other methods for determining market value if no quotations are available.

Quotations for open-end investment company shares are found in metropolitan newspapers under "Mutual Funds" in the over-the-counter department. Bid and asked prices are shown. The bid is the price that may be obtained in the event the investor wishes to redeem his shares. This is also the net asset value per share (less a small fee in some instances). The asked, or offering, price is the price that must be paid and includes the sales commission. Again, these quotations are different from the quotations for other securities, which are determined by supply and demand.

The fact that open-end-company shares are sold continuously has produced a unique selling mechanism. Generally, an open-end company management enters into an agreement with the principal distributor pursuant to which the distributor is granted the exclusive right to distribute the company's shares. These shares are purchased by the distributor or underwriter at a price, which will net the company an amount equal to the net asset value. The distributing firm, which is usually associated with the original organizer and sponsor of the investment company, thus becomes the principal underwriter.

The distributor-underwriter may distribute the investment company stock to the public through its own organization. More usually, its selling activities are confined to interesting security dealers in the investment company. They in turn distribute the investment company stock to the public. Out of the total load of 8 to 8.5 percent of the offering price, the principal distributor may retain around 30 percent. A principal underwriter or distributor sometimes employs wholesalers, who are granted exclusive territorial rights; and the wholesalers in turn distribute to retail dealers. Retail dealers are supplied with selling literature and copies of the prospectus.

A distributor organization may be by-passed if the investment company wishes to sell its shares directly. Another type of distribution has emerged in recent years, known commonly as the plan company. These companies specialize in offering investors participation in contractual plans involving the purchase of open-end-company shares.

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