Packaged Securities - Investment Companies

According to a 1940 Act of Congress, an investment company is an issuer primarily engaged in investing in securities, then issuing certificates in shares of the portfolio of securities it has acquired. The investment company invests the money it receives from investors on a collective basis, and each investor shares in the profits and losses in proportion to his or her interest in the investment company as a whole. The performance of the investment company will be based on, but not identical to, the performance of the assets it owns.

There are three types of investment companies:

  1. Closed-end funds
  2. Open-end funds, more commonly known as mutual funds
  3. Unit investment trusts (UITs)

Closed-end funds
These funds generally do not continuously offer their shares for sale. Rather, they sell a fixed number of shares in an initial public offering, after which the shares typically trade on the NYSE or Nasdaq.

  • The price of closed-end fund shares that later trade on a secondary market is determined by the market and may be greater or less than the shares' net asset value (an important term that will be defined soon).

  • Generally, closed-end fund shares are not redeemable: in other words, a closed-end fund is not required to buy back its shares from investors upon request.

  • Some closed-end funds, commonly referred to as interval funds, offer to repurchase their shares at specified intervals.

  • The investment portfolios of closed-end funds usually are managed by separate firms, known as investment advisors, that are registered with the SEC.

  • Closed-end funds are permitted to invest in a greater amount of illiquid securities - ones that cannot be sold within seven days - than mutual funds.

  • Because of this feature, funds that seek to invest in markets where the securities tend to be more illiquid are typically organized as closed-end funds.

Open-end Funds (Mutual Funds)
A company that pools money from many investors and purchases stocks, bonds, short-term money market instruments and other securities.

  • Investors buy mutual fund shares from the fund itself or through its broker, but cannot buy the shares from other investors on an exchange.

  • The price investors pay for mutual fund shares is the fund's per share net asset value (NAV) plus any shareholder fees the fund imposes at purchase, such as sales loads.

  • Mutual fund shares are redeemable, meaning mutual fund investors can sell their shares back to the fund or to its broker at their approximate NAV, minus any fees the fund imposes at that time, such as deferred sales loads or redemption fees.

  • Generally, mutual funds sell their shares on a continuous basis, although some funds will stop selling when they become too large.

The investment portfolios of mutual funds, like those of closed-end funds, typically are managed by investment advisors registered with the SEC.

Learn about the benefits and pitfalls of mutual funds within the Mutual Fund Basics tutorial.

Unit investment trusts (UITs)


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