Generally, an "investment company" is a company (corporation, business trust, partnership, or Limited Liability Company) that issues securities and is primarily engaged in the business of investing in securities.
An investment company invests the money it receives from investors on a collective
- Mutual funds (legally known as open-end companies);
- Closed-end funds (legally known as closed-end companies);
- UITs (legally known as unit investment trusts).
- A UIT typically will make a one-time "public offering" of only a specific, fixed number of units (like closed-end funds). Many UIT sponsors, however, will maintain a secondary market, which allows owners of UIT units to sell them back to the sponsors and allows other investors to buy UIT units from the sponsors.
- A UIT will have a termination date (a date when the UIT will terminate and dissolve) that is established when the UIT is created (although some may terminate more than fifty years after they are created). In the case of a UIT investing in bonds, for example, the termination date may be determined by the maturity date of the bond investments. When a UIT terminates, any remaining investment portfolio securities are sold and the proceeds are paid to the investors.
- A UIT does not actively trade its investment portfolio. That is, a UIT buys a relatively fixed portfolio of securities (for example, five, ten, or twenty specific stocks or bonds), and holds them with little or no change for the life of the UIT. Because the investment portfolio of a UIT generally is fixed, investors know more or less what they are investing in for the duration of their investment. Investors will find the portfolio securities held by the UIT listed in its prospectus.
- A UIT does not have a board of directors, corporate officers, or an investment adviser to render advice during the life of the trust. Basis, and each investor shares in the profits and losses in proportion to the investor's interest in the investment company. The performance of the investment company will be based on (but it won't be identical to) the performance of the securities and other assets that the investment company owns.
The federal securities laws categorize investment companies into three basic types:
In general, there are other types. A fourth and lesser-known type of Investment Company is a Face-Amount Certificate Company. A major type of company not covered under the Investment Company Act is private investment companies, which are simply private companies that make investments in stocks or bonds, but are limited to under 100 investors and are not regulated by the SEC. These funds are often composed of very wealthy investors.
A mutual fund is a type of Investment Company that pools money from many investors and invests the money in stocks, bonds, money-market instruments, other securities, or even cash. While there is no legal definition of the term "mutual fund", it is most commonly applied to so-called open-end investment companies, which are collective investment vehicles that are regulated and sold to the general public on a daily basis.
Mutual funds are generally classified by their principal investments. The four main categories of funds are money market funds, bond or fixed income funds, stock or equity funds, and hybrid funds. Funds may also be categorized as index (or passively managed) or actively managed.
A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
Closed-end funds are usually listed on a recognized stock exchange and can be bought and sold on that exchange. The price per share is determined by the market and is usually different from the underlying value or net asset value (NAV) per share of the investments held by the fund. The price is said to be at a discount or premium to the NAV when it is below or above the NAV, respectively.
Unit Investment Trusts (UITS)
An investment company that offers a fixed, unmanaged portfolio, generally of stocks and bonds, as redeemable "units" to investors for a specific period of time. It is designed to provide capital appreciation and/or dividend income.
Some of the traditional and distinguishing characteristics of UITs:
A UIT typically issues redeemable securities (or "units"), like a mutual fund, which means that the UIT will buy back an investor’s "units," at the investor’s request, at their approximate net asset value (or NAV) . Some exchange-traded funds (ETFs) are structured as UITs. Under SEC exemptive orders, shares of ETFs are only redeemable in very large blocks (blocks of 50,000 shares, for example) and are traded on a secondary market.
.....save (something) for a rainy day, Invest wisely.