Financial Markets 20

Financial Markets 20 - 1 Chapter 20 Investment Companies...

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Chapter 20 Investment Companies and Hedge Funds In this chapter we will focus on: Investment Funds, Money Market Mutual Funds and Real Estate Investment Trusts (REITs). Investment funds gather funds from savers for investment in capital and money market instruments or investment in specialized assets, such as real estate. Most specialize in long-term investments. They provide investors with risk intermediation by investing in a diversified portfolio of assets. They also provide denomination (investment commitment levels) intermediation, investing in large blocks of securities and typically selling shares to consumers in smaller denominations. I. Investment Companies A. Closed-end Investment Companies or Funds (CEFs)- # of shares outstanding; A nonbank financial institution that sells stock, then diversifies investors’ risk by buying many investments; such funds also provide professional management for investments. A CEF is a publicly traded investment company that initially raises funds from investors through an IPO (Initial Public Offering) and uses the money to invest in securities. Their shares are traded on an exchange. Generally don't buy back shares from shareholder. A shareholder who wants additional shares buys them in the secondary market. The price of a share is determined by supply and demand. Advantages to the investor: professional investment management, diversification with small investment, variable denominations (amounts invested). 1. Different Types of Equity CEFs Diversified Domestic Funds - Though broadly diversified with U.S. equities, these funds may emphasize a theme, such as: growth funds, value funds, market timing funds, small cap funds, blue chip funds, etc. Sector Funds - Focus on sectors, such as: banking and financial stocks, media related stocks, gold stocks, environmental stocks, health stocks, high tech stocks, etc. Single Country Funds - Focus on securities of a single country, such as India, South Korea, Japan, etc. 1
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Regional Funds - Focus on regions rather than individual countries, such as South America, Southeast Asia, Latin America, China, Europe, etc. Emerging Markets - Focus on stocks of developing nations. Global Funds - Invest in U.S. and international markets, varying their allocations as market conditions demand. 2. Price and Net Asset Value (NAV) Two important prices for shares in a closed-end fund: (1) Market price - The price at which the shares trade; determined by supply and demand. (2) Net Asset Value (NAV) NAV = (Value of Total Assets - Total Liabilities) / Shares Outstanding Though some funds sell above their NAV (premium), most CEFs trade below (discount) their net asset value, often as much as 15% - 20% or more. (See page 704 of the text or Monday's edition of the
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This note was uploaded on 08/08/2011 for the course FINN 3053 taught by Professor Staff during the Spring '08 term at Arkansas.

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Financial Markets 20 - 1 Chapter 20 Investment Companies...

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