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Series 6

Investment Companies - Unit Investment Trust (UIT)

A unit investment trust, or UIT, is a company established under an indenture or similar agreement.
  • The management of the trust is supervised by a trustee.
  • Unit investment trusts sell a fixed number of shares to unit holders, who receive a proportionate share of net income from the underlying trust.
  • The UIT security is redeemable and represents an undivided interest in a specific portfolio of securities.
  • The portfolio is merely supervised, not managed, as it remains fixed for the life of the trust. In other words, there is no day-to-day management of the portfolio.
Exam Tips and Tricks
Make sure you know the distinguishing features of each type of investment company! You are sure to see a question on the exam that will test your knowledge of this subject.

Face Amount Certificates
A face amount certificate company issues debt certificates at a predetermined rate of interest.
  • Certificate holders may redeem their certificates for a fixed amount on a specified date, or for a specific surrender value, before maturity.
  • Certificates can be purchased either in periodic installments or all at once with a lump sum payment.
  • Face amount certificate companies are almost nonexistent today.
Management Investment Companies
The most common type of investment company is the management investment company, which actively manages a portfolio of securities to achieve its investment objective. There are two types of management investment company: closed-end and open-end. The primary differences between the two come down to where investors buy and sell their shares - in the primary or secondary markets - and the type of securities they sell.
  • Closed-End Investment Companies: A closed-end investment company issues shares in a one-time public offering. It does not continually offer new shares, nor does it redeem its shares like an open-end investment company. Once shares are issued, an investor may purchase them on the open market and sell them in the same way. The market value of the closed-end fund's shares will be based upon supply and demand, much like other securities. Instead of selling at net asset value, the shares can sell at a premium or at a discount to the net asset value.
  • Open-End Investment Companies: Open-end investment companies, also known as mutual funds, continuously issue new shares. These shares may only be purchased from the investment company and sold back to the investment company.
The rest of this section will focus primarily on mutual funds, which will make up most of your future investment business. For a quick review of the basics of mutual funds, refer to the tutorial Mutual Fund Basics.
Exam Tips and Tricks
As with the general investment company types, you should also know the distinguishing features of open-end versus closed-end investment companies AND the difference between a closed-end investment company and a unit investment trust (UIT). You are sure to be tested on this for the exam.

Next: Investment Company Registration, Regulations and Rules »


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