ch4outline - Chapter 4 outline I. Investment companies A....

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Chapter 4 outline I. Investment companies A. Investment companies are financial intermediaries tat collect funds from individual investors and invest in those funds in a potentially wide range of securities or other assets B. Pooling assets is the key idea behind investment companies C. Each investor has a claim to the portfolio established by the investment company in proportion to the amount invested D. Investment companies perform several important functions for their investors: 1. Record keeping and administration. a. Issue periodic status reports, keeping track of capital gains distributions, dividends, investments, and redemptions b. And they may reinvest dividend and interest income for shareholders 2. Diversification and divisibility a. Investment companies enable investors to hold fractional shares of many different securities 3. Professional management attempt to achieve superior investment results for their investors 4. Lower transaction costs a. Because they trade large blocks of securities, they can achieve substantial savings on brokerage fees and commissions E. While all investment companies pool the assets of individual investors, they also need to divide claims to those assets among those investors F. The value of each share is called the net asset value, or NAV , 1. Net asset value equals assets minus liabilities expressed on a per-share basis 2. NAV= market value of assets minus liabilities/ shares outstanding II. Types of investment companies A. In the United States, investment companies are classified by the Investment Company Act of 1940 as either unit investment trusts or managed investment companies 1. The portfolios of unit investment trusts are essentially fixed and thus are called “unmanaged” B. Managed companies are further classified as either closed-end or open-end 1. open-end companies are what we commonly call mutual funds C. Unit investment trusts 1. Unit investment trusts are pools of money invested in a portfolio that is fixed for the life of the fund
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2. To form a unit investment trust, a sponsor, typically a brokerage firm, buys a portfolio of securities which are deposited into a trust 3. It then sells to the public share, or “units,” in the trust, called redeemable trust certificates 4. All income and payments of principal from the portfolio are paid out by the fund’s trustees(a bank or trust company) to the shareholders 5. There is little active management of a unit investment trust because once established, the portfolio composition is fixed; hence these trusts are referred to as unmanaged 6. Trusts tend to invest n relatively uniform types of assets 7. The trusts provide investors a vehicle to purchase a pool of one [particular type of asset, which can be included in an overall portfolio desires 8. The lack of active management of the portfolio implies that management fees can be lower than those of managed funds 9. Sponsors of unit investment trusts earn their profit by selling shares in the trust at a premium to the cost of
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ch4outline - Chapter 4 outline I. Investment companies A....

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