Feeling Safe With Open-End Stocks

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When the phrase "open-end" was first used, apparently it meant merely that a company was continuing to issue additional shares of its stock, and to redeem shares, and that the total number of shares outstanding might rise or fall.

But the meaning of "open-end" has grown to include all of the laws, regulations, and customs that distinguish what are now the principal group of American investment companies from the older type called "closed-end," as well as from other corporations aside from investment companies. "Open-end" is a legal expression; "mutual fund" is the popular label with the same meaning.

To anyone familiar with investing in such forms as a U.S. savings bond, a bank savings deposit, a savings and loan association membership, or a life-insurance policy, the idea of "open-end" is so commonplace that he may think, "Of course! Why not?" But in corporate stock, the standard practice has been quite the opposite.

The first open-end investment company was started in 1924, and not until 1942 did this type begin the growth that has raised the number of companies and the assets of the group to be several times as large as in the closed-end group.

In the great majority of mutual funds, the price on a share sold to an investor includes a sales charge, usually around eight percent of the price. This charge replaces the usual broker's commission or dealer's fee on other stocks. On a small purchase, the selling charge on a mutual fund may be smaller than the fee an investor pays on other stock of the same dollar amount. When a stockholder wishes to dispose of his stock, a mutual fund redeems its shares at net asset value. A few funds charge a fee of around one percent, but most of them make no charge. On other stocks, a seller must pay a broker's fee at the same rate as when he bought.

In 1958, more than a score of mutual funds had no sales charge, and in several others the charge was less than three percent. Thus if an investor thinks it is foolish to pay a selling expense, he can pay little or none, and still gain many of the advantages of owning shares in a mutual fund, taking his choice among balanced funds and several varieties of common-stock funds.

Another way to lower the selling charge is to place large orders, for the charge drops on a sliding scale, usually starting at $25,000.

Aside from investments, when an article is offered for sale, customarily the price is set high enough to include the expenses connected with selling it. When a housewife buys food in a supermarket, there may be no salesman, strictly speaking, but she must pay the store for the expense of bringing the various items to her community, storing them, and displaying them in an attractive manner in a convenient location. The store does not state this expense separately, but necessarily it is included in the price she pays.

There is nothing peculiar about a price being set high enough to cover selling expense. The unusual feature of mutual funds is that the Securities and Exchange Commission, an agency of the U.S. government, has a rule that if the price asked by a mutual fund or its dealers is higher than net asset value, then the prospectus and any sales literature issued by the fund must state exactly what that extra charge is, so that any investor who bothers to read carefully is reminded of it Apparently nowhere else in American business does a selling organization tell a customer how much is added to cover the cost of selling.

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