3. Investment Companies

Question 1

Investment companies

Answer 1

• Collect funds from individual investors and invest those in securities or other assets
• Investors have claim in proportion to amount invested

Question 2

Services of investment companies

Answer 2

• Administration & record keeping
• Diversification & divisibility
• Professional management
• Reduced transaction costs

Question 3

Net asset value

Answer 3

• To calculate claim in fund
• Basis for valuation of Investment Companies shares
• (Market value of assets - Liabilities) / Shares outstanding

Question 4

Types of investment organisations

Answer 4

• Unit trusts
• Managed investment companies
• Other investment organizations (REITs and hedge funds)

Question 5

Difference open-end and closed-end

Answer 5

o Open-End (= mutual funds, SEC regulated)

• no restriction on amount of shares it will issue (can issue/redeem at every moment)
• not allowed to go short

o Closed-End

• publicly traded IC that raises fixed amount of capital through IPO
• shares not issued to meet demand of investor

Question 6

Open-end vs closed-end mutual funds

Answer 6

• Shares outstanding:
  o Open-end: changes when new shares are sold or old shares are redeemed.
  o Closed-end: no change unless new stock is offered.
• Pricing:
  o Open-end: Net Asset Value (NAV);
  o Closed-end: premium or discount to NAV.

Question 7

Investment policies

Answer 7

Money market, equity, sector, bond: government bonds/corporate bonds, balanced, asset allocation and flexible, index: usually passive investments, international

Question 8

Mutual funds (open-end)

Answer 8

• Fee structure:
  o Front-end load (smaller than 8.5%)
  o Back-end load (start at 5-6%, decrease with years invested)
• Operating expenses: paid through reduced value of portfolio
• 12 b-1 charges: distribution costs paid by fund, advertising, alternative

Question 9

Late trading

Answer 9

Allowing some investors to purchase or sell later than other investors

Question 10

Market timing

Answer 10

Allowing investors to buy or sell on stale net assets values

Question 11

Mutual funds window dressing

Answer 11

Fund manager sells stocks with large losses and purchases high flying stocks near end of quarter -> are reported as part of fund’s holdings

Or invest in stocks that don’t meet style of fund -> investors have no idea what they’re paying for.

Question 12

Advantages exchange-traded funds

Answer 12

ETF’s, low transaction costs, low management fees

Question 13

Morningstar rating system

Answer 13

Star rating system: 1-5 stars, the higher the more reliable

Question 14

Value stocks

Answer 14

Low market price per share, low price relative to fundamental value

Question 15

Growth stocks

Answer 15

High maker price per share, since investors believe firm will experience rapid growth