Investment Companies Flashcards
What are the three types of investment companies
Close Ended- They have a fixed initial market capitalization because a specific number of shares are initially sold to the public. Shares are traded on organized exchange, and no new shares are issued by the fund. Shares may trade at premium or discount of net asset values.
Open-End Funds- Have unlimited number of shares, as long as fund receives contributions, the fund family will continue to issue shares. Shares are bought and redeemed directly from fund family. Shares trade at Net Asset Value (Assets-Liabilities)/ Shares Outstanding
Unit Investment Trust- Can be equity or fixed income unit investment trust. Typically a fixed income trust. Managed by a trustee, there is no investment manager. Self liquidating, have passive management and no trading of assets within the trust. Issues units not shares. Units can be sold back to UIT at NAV (very thinly traded secondary market.
What are the types of mutual funds?
- Aggresive growth - Invest Small caps and offer greatest potential for capital appreciation
- Growth - Equities with high P/E, little to no dividends and growing earnings and revenue rapidly
- Growth and Income: invest in equities and income-producing assets. Primary objective is to provide capital appreciation and income.
- Value Fund - Invest in undervalued funds that have a low P/E, high dividend yields and positive future outlook
- Balanced Fund - invest in more bonds than a typical equity fund. Seeks a well-balanced return in the form of both income and capital appreciation
- Bond Fund - Provides investors with a liquid bond investment that is cost effective and fairly conservative
- Money Market Funds- Highly liquid, appropriate for emergency fund and invests in securities with maturities of less than 90 days.
- Index Funds- track performance of various market indices, are a passive investment strategy that are tax efficient.
- Sector Funds - invest in sectors of the economy such as telecommunications, healthcare, financial services, ect
- Asset Allocation Funds or Lifecycle: Well diversified portfolios including stock, fixed income, international and money market securities
- Global Funds - Invest in international and US Funds
- International Funds - Excludes US securities
what are the various fund expenses?
- No load funds- do not charge a sales commission when purchased or reememed
- LoadFunds- charge a sales commission when purchased or redeemed. Examples of load funds include A shares, B Shares, and C shares
A shares: front-end load and small 12b-1 fees. Appropriate for long-term investors
B Shares: Contain back-end sales load (redemption fee) Have high end 12b-1 fee typically the maximum 12b-1 fee of 1% Only advantage is that investor would not pay the front-end load but would have to pay higher 12b-1 fee until shares converted into A Shares.
C Shares- don’t charge front end load, usually charge a small back-end loand and charge the maximum 12b-1 fee of 1% Appropriate for short term investors
What are the three types of REITs
- Equity- investment in real estate for capital appreciation, income is generated from rental income and appreciation
- Mortgage- invest mostly in mortgages and construction loans, make the spread between lending and borrowing rate
- Hybrid- Combo of both equity and mortgage
Hedge against’ inflation and 90% of investment income must be distributed to shareholders to maintain tax-exempt status.
What are characteristic of American Depository Receipts (ADRs)
They represent foreign stock held in domestic banks’ foreign branch, entitle shareholders to dividends and capital gains. Capital gains in ADRs include currency fluctuation. They trade on US exchanges are denominated in US dollars and trade in US dollars. Dividends paid in US dollars. DOES NOT ELIMINATE EXCHANGE RATE RISK. It does help eliminate currency risk and can finance foreign exports as well.
Alternative Investments
Investments that are not thought of as cash, equities, or bonds. Common characterizes are they are typically high risk investments with large minimum purchase requirements and high fees. Actively managed may use leverage to enhance their returns, invest in illiquid assets. Liquidity may be limited or nonexistent. no secondary market, but may offer redemptions at periodic times with advance notice.
Most common include
Hedge Funds- No regulations, self report, seek positive performance, available to accredited investors only
Collectibles- Fine arts, antiques, baseball cards, High risk of fraud, subject to demand and consumer tastes. Net long-term gains from sales subject to federal income tax rate of
28%
Precious metals
Cryptocurrency- Not associated with any particular country or central bank, not widely accepted as a form of payment, as value is derived from supply and demand.
