Investment Companies Flashcards
Define❓ Investment companies
✅ Create packaged products for clients to invest in. They take the investors’ money and apply it, everyone invested shares in the profits and losses.
List the three types of investment companies❓
✅ - Management investments
✅ - Face-amount certificate investments
✅ - Unit investment trusts
What must an investment company disclose when registering with the SEC❓
✅ 1. Whether it will be Open or Closed ended funds
✅ 2. The names and addresses of all affiliated peoples
✅ 3. Whether the money raised will be borrowed
✅ 4. If they play on investing in commodities or real estate
✅ 5. How they plan on investing (single industry, many industries, debt securities, etc)
✅ 6. Conditions in which the investment plan can change (ex: a vote of shareholders)
✅ 7. The business experience of each director and officer
Define ❓ Open-ended funds
✅ Also known as a Mutual Fund. These are pooled investments that are continuously issuing and redeeming shares from the issuer.
List features of Open-End Funds❓
✅ Always issuing and redeeming shares thus always accepting new investors
✅ Summary and Full prospectus must always be available for mutual funds
✅Trade at end of day NAV price (redemption value) also known as redemption value
✅Purchased at the Public offering price (POP) (ask price)
✅ Available in several flavors
How is the NAV calculated❓
✅ To calculate NAV = (Total Value of Fund’s Assets – Fund’s Liabilities) ÷ Number of Shares
This price is calculated once per day, usually after the market closes at 4 PM ET.
How Is a Mutual Fund’s Price Determined❓
✅ mutual fund’s price is based on its Net Asset Value (NAV), calculated once per day after markets close
Define ❓Closed Ended Funds
✅ Funds that issue a fixed number of shares that are then traded on an exchange like a stock (ETFs)
List features of Closed Ended Funds❓
✅ Trade at a market price (POP) that is based on supply and demand, not NAV
✅ The NAV for closed end funds is considered the parity price and closed end funds can trade at a discount or premium to NAV
✅ Closed-end funds are originally purchased from the issuer but then trade on the secondary market
✅ Shares are not redeemed from the issuer, instead they are bought and sold on the market
✅ Also available in several flavors
How do closed-end funds trade in relation to NAV❓
✅ Closed-end funds have an NAV, but they trade like stocks on an exchange — at market price, not directly at NAV.
💡 Market price is based on supply and demand, not the NAV itself.
Open vs Closed funds❓ Capitalization
✅ Open - Continuous offering of new shares (no fixed amount)
✅ Closed - One time offering of securities (fixed number of outstanding)
Open vs Closed funds❓ Pricing of fund
✅ Open - Purchased at NAV plus commission
✅ Closed - Purchased at Current Market Value (POP) plus commission
Open vs Closed funds❓Issues
✅ Open - Common stock only
✅ Closed - Common stock, preferred stock, and debt securities
Open vs Closed funds❓ Share price
✅ Open - Shares can be bought in full and fractions (up to 3 decimals)
✅ Closed - Shares can be purchased in full only
Open vs Closed funds❓ Purchased and Sold
✅ Open - Shares are sold and redeemed by the fund only
✅ Closed - IPO through underwriters at first, afterwards they are traded over the counter or on an exchange like stocks
Types of Open/Closed funds❓ Money Market
✅Invested in short term debt securities
✅ Usually offer check writing capabilities
✅ Always no load (no sales charge)
✅ Computes dividends daily and pays them monthly
✅ No penalty for early redemption
Types of Open/Closed funds❓ Income Funds
✅ Meant to provide income by investing in preferred, (b) common, and (a) bonds that pay consistent dividends/interest.
✅ Not as much growth (capital appreciation)
✅Considered safe
✅ Good for retirees and those looking for steady income
Types of Open/Closed funds❓ Balanced Fund
✅ Combination of both Income and Growth funds meant to provide income and capital appreciation (growth)
✅ These funds don’t get hammered when the market is bearish but also don’t grow as much when the market is bullish
✅ Investments include common stocks, preferred stocks, bonds, short term and long-term bonds.
Types of Open/Closed funds❓ Growth Funds
✅ Considered riskier due to being invested in a diverse portfolio of common stocks, these funds seek capital appreciation.
✅ Invested in new up and coming and established companies
✅ Better for younger investors
✅ Some are even more aggressive called Aggressive Growth Fund
Types of Open/Closed funds❓ Specialized (sector fund)
✅ Invested in a single sector such as automotive, finance, healthcare, tech, etc.
✅ Considered riskier because the diversification is limited
Types of Open/Closed funds❓ International or global fund
✅ Funds that invest in international companies
✅ International - invest ONLY in companies outside your country
✅ Global - funds are invested in companies in and outside of your country
Types of Open/Closed funds❓ Index funds
✅ Funds meant to match the performance of a specific market index.
✅ Passively managed
✅ Low to no fees
✅ Follows benchmark
✅ Examples
S&P 500 Index - 500 largest companies in the US (apple, MS, JPMorgan)
Dow Jones (DIJA) - 300 blue chip US companies (McDonalds, Boening, Coca-Cola, Disney)
Nasdaq-100 - 100 largest non-finance tech companies (google, meta, tesla, Nvidia)
Types of Open/Closed funds❓ Hedge funds
✅ funds that are actively managed with the goal of rapid capital growth
✅ Not required to register with SEC due to being invested in private equity funds mainly
✅ Reserved for Accredited investors
✅ Require large amount of initial investment (500k+)
✅ Invest on margin, Options, shorting, etc.
Types of Open/Closed funds ❓ Life Cycle Funds (target date)
✅ funds that invest more aggressively (equity securities) the further from the target date, and gradually rebalance over the years to more fixed income securities (bonds, preferred stock)
