Investing Companies

Details

Category: Investment Type

A corporation or trust engaged in the business of investing the pooled capital of investors in financial securities. This is most often done either through a closed-end fund or an open-end fund (also referred to as a mutual fund). Investment companies are business entities, both privately and publicly owned; those manage, sell, and market funds to the public. They typically offer investors a variety of funds and investment services, which include portfolio management, recordkeeping, custodial, legal, accounting and tax management services. Such profits came from the fact that the investment companies placed deposits with and loaned money to the investment banks that sponsored them, served as depositories for the stocks they underwrote, issued shares to the investment banks' partners for a fraction of their market price, and paid underwriting fees and in some cases salaries to the investment banks' partners for sitting on the boards of directors of the investment companies.

There are two basic types of traditional investment companies: (1) open-end, better known as a Mutual Fund which has a floating number of outstanding shares (hence the name open-end) and stands prepared to sell or redeem shares at their current Net Asset Value and (2) closed-end, also known as an investment trust, which, like a corporation, has a fixed number of outstanding shares that are traded like a stock, often on the New York and American Stock Exchanges. Two other varieties of investment companies, Exchange-Traded Funds (Etfs) and Unit Investment Trusts (Uits) have more recently become commonplace and are covered separately. Investment companies are publicly held corporations or trusts "in the business of investing, reinvesting, owning, holding, or trading in securities." In the form of mutual (or open-end) funds, they constituted the most spectacular growth industry on Wall Street in the late twentieth century, which is all the more remarkable in light of the role that (closed-end) investment companies played in the speculative mania leading.

Open-end management companies are basically divided into two categories, based on the way they distribute their funds to customers. The first category is load funds, which are sold in the over-the-counter market by broker-dealers, who do not receive a sales commission; instead a "loading charge" is added to the net asset value at time of purchase. For many years the charge was 81⁄2%, but more recently it has been reduced to 4.5%-5%. Many load funds do not charge an upfront load, but instead impose a Back-End Load which customers must pay if they sell fund shares within a certain number of years, usually five. Funds are available as classes of shares, each having a different fee structure. The second category is no-load funds, which are bought directly from sponsoring fund companies. Such companies do not charge a loading fee, although some funds levy a redemption fee if shares are sold within a specified number of years.