Investment Company

A company or trust, such as unit investment trusts and management companies, engaged in the business of investing the pooled funds of small investors in securities appropriate for stated investment objectives. For a fee, it provides investors with more diversification, liquidity, and professional management service than would normally be available to them as individuals.  There are two types of management companies–closed-end and open-end mutual funds. Closed-end investment companies are traded in the open market and are bought and sold like any other stock. The capitalization of a closed-end fund usually remains constant and has a fixed number of outstanding shares. Open-end mutual funds sell their shares directly to investors, are ready to buy back their old shares at their current net asset value, and are not listed. The capitalization is open-end funds are not fixed–they issue more shares as investors want them.  Open-end management companies may either be “load” or “no-load” mutual funds. Load funds are sold by broker-dealers who receive a percentage that is added into the net asset value. The percentage is determined by the amount of the client’s investment into the fund. Load funds often can be redeemed free of any charges from the fund. No-load funds are usually bought from the mutual fund and do not charge a loading fee. However, small redemption fees are not uncommon.  Every investment company states its specific investment objectives in its registration statement and prospectus. An investment company usually falls within one of the following categories:

  • Diversified common stock funds;
  • Balanced funds that mix bonds and preferred and common stocks;
  • Bond and preferred stock funds that feature fixed income;
  • Specialized funds by industry, groups of industries, geography or size of company;
  • Income funds–income generated from high-yield securities;
  • Performance funds (growth stocks);
  • Dual-purpose funds–a closed-end investment company that offers a choice between dividend shares or capital gain shares and;
  • Money market funds (money market instruments).
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