Investment companies are companies holding securities of other firms exclusively for investment purposes. The main business of these companies involves investing money on behalf of shareholders. These shareholders share in the profits and losses.
In the United States, the law states that there are more than three basic types of investment companies. Three of the most common and popular are closed-end management investment companies, open-end management investment companies and unit investment trusts.
Open-End Management Investment Companies
An open-end management investment company offer mutual funds. A mutual fund is a form of collective investment pooling money from a number of investors. The money is invested in bonds, stocks and other securities. The underlying securities of the fund are traded. Capital gains and losses are realized and the interest income or dividend is collected. The proceeds are then forwarded to the investors.
Closed-End Management Investment Companies
Another basic recognized type of investment companies are closed-end management investment companies. These companies take care of closed-end funds. A closed-end fund is a form of collective investment with only a limited number of shares. In the US, they are also called closed-end funds. They are known as listed investment companies in Australia and investment trusts in the UK. Investors can acquire shares by purchasing on a secondary market usually from a market maker, broker or another investor. The share's price is partially determined by the investment's value in the fund and by the discount or premium placed on it. The total value is divided by the number of shares.
Unit Investment Trust
In the United States, a unit investment trust offers an unmanaged or fixed portfolio of securities that have a definite life. They are sold to investors through brokers. A portfolio usually contains any of the different types of securities. Stock or equity trusts and bond or fixed income trusts are the two primary security types. Unlike a mutual fund or an open-end fund, a UIT is created for a specific period of time. It is also a fixed portfolio, which means that the securities of UIT will not be sold or bought except in certain conditions. One good example of these conditions is when a company files for bankruptcy. Another situation is when the company has to sell the securities because of a merger.
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