The Redemption of Shares vs. Purchase of Shares

by Geri Terzo, studioD

The redemption of shares and the purchase of shares are on the opposite ends of the investment spectrum. When redeeming shares, or units as is the case in mutual fund investing, investors are relinquishing exposure to a particular investment. In exchange, investors receive the proceeds from the sale. The purchase of shares represents entry into an investment, such as a mutual fund. Restrictions can apply to both activities.


Investors who purchase shares in a mutual fund are contributing to a portfolio that contains pooled assets from multiple investors. A fund manager is responsible for buying and selling shares of stocks or other financial securities and an investor's profits are dependent on the selections made by that professional. When an investor decides to sell shares, or redeem assets from the fund, a mutual fund has approximately a week to return money to investors, according to the U.S. Securities and Exchange Commission (SEC).


An investor may choose to redeem shares for various reasons, including political uncertainty. In August 2008, when the U.S. Congress struggled to reach a consensus about the future of the country's debt limits, investors redeemed more capital from the financial markets than what was invested. During that month, nearly $130 billion was withdrawn from equity and money market funds versus deposits of only $13 billion into bond portfolios in the same period, according to Lipper.


Mutual funds could impose restrictions on the redemption of shares, in which case investors who are in violation of these terms may be charged extra fees.The purpose of redemption restrictions is to prevent too many investors from exiting a fund at once and forcing a fund manager to sell assets prematurely. Investors may also face restrictions when purchasing shares of a mutual fund. Unlike open-ended funds that do place restrictions on the number of available shares, close-ended funds offer a limited number of shares for purchase, according to "Forbes."


Mutual fund investors may be exposed to fees either when redeeming or purchasing shares, depending on the type of fund. A firm may charge front-end fees when investors buy into a fund or back-end fees when investors are exiting. These expenses are to cover the transactions that occur in the financial markets. Management fees may also be assessed. The details surrounding a mutual fund's fee structure are typically outlined in a prospectus, which is a public document filed with a regulatory agency.

About the Author

Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.

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