Investment Company Flashcards
What is an investment company
A financial institution investing in securities
What is the most appealing aspect of a investment company
Diversification, liquidity, and professional management with managed funds
What are 3 classifications of investment companies
- Face amount certificates companies
- Unit Investment Trust (UITs)
- Management Companies:.
What are face amount certificates
Debt certificates at a discount that pay a stated “face value” amount at maturity
What is a Unit Investment Trust (UIT)
- Fixed portfolio of corporate or municipal bonds
- Is not managed
- Charge little or no management fee
- Pay interest not dividends
Management companies
- Open-end
- Closed- end
- Diversified
- Non-diversified
Open end investment company
Mutual funds
Mutual funds
- All shareholders share in the fund’s gains, losses and income
- Are not back by the FDIC
- Issue only redeemable shares
- Forward pricing
Net Asset Value (nav)
Total assets of the fund less the total liabilities divided by the total number of shares outstanding
Forward pricing
The next calculated bid or ask price after the order is entered
Max sales load under the investment company act of 1940
Is 9% and 8% under FINRA rules
Closed end investment company
- Does not issue redeemable shares
- No sales load - commission is charged
- Fixed capitalization - a fixed number of shares are issued
- May issue common stock, preferred stock and bonds
Business Development Company (BDC)
- A closed end investment company
- Provides debt capital to small and medium sized companies
- BDCs are required to distribute at least 90% of their income as dividends
Both open-end and closed-end companies are subject to
Market risk
The major difference between closed-end and open-end funds is
Capitalization
Open-end investment companies (mutual funds)
- Issue redeemable shares
- Uses forward pricing
- NAV relates to Bid/Ask
- Capitalization is constantly changing
- Only issue voting common shares
- Charge a sales load
- Deals with the public
- Subject to market risk
Closed-end investment companies ( publicly traded investment company)
- Trade in the secondary market (OTC) based on Supply and Demand
- Fixed capitalization
- Issue voting for common stock, preferred stock and bonds
- Charge commission
- Does not deal with the public on daily basis
- Subject to market risk
Diversified common stock fund
Invests in common stock of many different companies in many different industries and fluctuates with the changing value of the common shares
Specialized / special situation/ Sector fund
- Invest in stocks of companies in one industry or one specific geographical area
- Riskiest type of fund
- Susceptible to market risks
Balanced fund
- Is most conservative and least volatile
- Requires funds to be invested in a diversified mix of bonds, preferred stock, and common stocks
Income fund
Goal is to maximize income
1. Income funds buy dividend-paying stocks and bonds with high yields
2. Combine income and capital appreciation
Growth fund
Goal is to appreciate capital
- Do not pay dividends and have lower yields
- Reinvest dividends and capital gains for additional growth
- Invest in small-cap common stock
- More volatile than other funds
International fund
Invests in stocks and bonds issued by foreign companies and governments
Global fund
Invests in stocks and bonds issued by U.S. and foreign companies
Index funds
Attempt to mirror the portfolio of a particular index and do not have active portfolio managers
Bond funds
Invest in portfolio that consists of bonds
a. When investing in a bond fund it will fluctuate in interest rates
Remember that prices fall when interest rates rise
Municipal bond fund
Invests in municipal bonds only
a. Dividend distributions, which represent interest received on bonds in the portfolio are exempt from federal income tax
b. Capital gains are subject to federal income tax
Money market funds
Invest in low risk debt securities with short- term maturities of 12 months or less.
Characteristics of money market funds
- Largest operating expense is management and advisory fees
- Most liquid mutual fund
- Credit dividends to customers accounts daily and pay them monthly
- Dividend income is fully taxable
Money market funds must
- Have an average weighted maturity of 90 days or less
- Offer minimal credit risk
- Have at least 95% of the funds total assets invested in securities
Money market funds offer
- No sales load
- Minimum withdrawals are set to $500
Money market funds invest in
Securities such as T-Bills, CD’s, commercial paper, bankers’ acceptances, and Eurodollars
