Millions of investors rely on mutual funds in order to get diversified exposure to the financial markets. Even with small amounts of money to invest, mutual funds let you own tiny positions in many different stocks, bonds, or other investments. Yet for those who are more familiar with the way that stocks trade, getting used to how mutual fund trading works can be a little tricky. In particular, you can enter a sell order for mutual funds after the market closes, but if you do, the order typically won't go through until the next day. Let's take a closer look at how mutual fund sell orders work.
The difference between stocks and mutual fundsStocks trade continuously when the market is open because there are always buyers and sellers willing to trade at a certain price in the secondary market. However, for mutual funds, there is no secondary market, and instead, you have to conduct purchases or sales with the mutual fund company directly. Most fund companies only calculate their net asset values at the close of the trading day, and so they process trades to buy or sell only once a day after that net asset value is established. Regardless of whether you're buying or selling, the price at which your mutual fund trade will go through is based on the net asset value, with additional sales charges applying in some cases with certain funds.
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In order to avoid giving investors an unfair advantage, mutual fund companies set deadlines for investors to enter sell orders. The usual cutoff time is 4 p.m. Eastern time, which corresponds to the normal end of the trading day on the New York Stock Exchange. Buy or sell orders received after the cutoff time are pushed to the next day, and so you'll get whatever the net asset value of the fund is for the following day rather than the current day.
The reason for this policy is easy to understand. Often, influential companies will wait until the market closes to release key news items, and what they say can often send the market moving up or down sharply. If you could enter a sell order after bad news comes out and still get the current day's net asset value, you could avoid the losses that are likely to happen the following day as a result of that bad news.
For a while, Fidelity did intraday pricing on its mutual funds, calculating net asset values on an hourly basis, and some other providers calculate net asset values more than once a day. However, with the availability of exchange-traded funds that trade on secondary markets and on which you can place sell orders anytime the market is open, the need for more frequent order availability for mutual funds has mostly disappeared.
You can enter trades for mutual funds any time you want. However, they'll only take effect on the current day if you get them in before the cutoff time. Otherwise, you'll have to wait until the next business day.
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The article Can I Enter a Sell Order for Mutual Funds After a Close? originally appeared on Fool.com.
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