How does a call option work and why would someone buy one?
What is a load?
A load is a commission or fee paid to a sales intermediary or broker by an investor. Separate from operating costs of a mutual fund, this sales charge can be paid upfront at the purchase of assets (front-end load), upon an investor selling assets (back-end load), or annually (12b-1 fee). When the fee is paid throughout the year, it is called a level-load fund. If there is no fee, it is called a no-load fund.
A load is essentially a percentage of the invested amount that brokers charge at the beginning, during or at the end of an investment schedule. It is typically within the 1 percent to 5 percent range and may vary according to the type of asset purchased.
Brokers often assign a type of load to a category of shares. Class A funds commonly feature a front-end load, Class B funds a back-end load, and Class C funds a level load. Here’s what to know:
- Front-end load: Requires an investor to pay a determined percentage of the invested amount upfront to enter a fund.
- Back-end load: Also known as a contingent deferred sales charge, this is a percentage deducted from the amount the investor receives after selling assets. In other words, the investor pays to exit the mutual fund.
- Level load: This fee is an ongoing charge billed to the investor and is also expressed as a percentage.
- No load: Although no-load funds denote no sales fee, charges can be deducted in other ways, such as a 12b-1. A 12b-1 fee was once classified as an operations expense, this amount is now charged annually by sales intermediaries, usually after the sale of an investor’s assets.
If you purchase a $10,000 fund with a front-load fee of 5 percent, you will be required to pay $500 as a fee. Therefore, the total amount would be $10,500 to enter the fund.
If you purchase the same $10,000 fund with a bank-end load of 5 percent, the broker will deduct $500 from the total value of your assets upon sale. Therefore, you will receive $9,500 after the transaction (assuming there are no gains).
If a broker charges a 1 percent level load annually for the same $10,000 fund, you will be required to pay $100 per year over a specified period unless adjusted.