How Are Investment Companies Organized?

Definition of Investment Company

• An investment company invests in other companies. The company obtains capital by issuing shares or units to investors. Investors share in the profit or loss of the various funds in which they invest. Investors do not participate in investment company profits or losses; only in the gains or losses of the specific funds in which shares were purchased. Investors benefit from professional management and ownership of a larger selection of securities than could otherwise be purchased by the individual. Investment companies are regulated by the Securities and Exchange Commission, the SEC, under guidelines established by the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940.
  
  

Open End Funds

• There are three categories of investments produced by investment firms. Open end, or mutual funds are the most common. The company forms a mutual fund, sells shares to investors to raise money and invests the funds in various securities as stated in the mutual fund's prospectus, or description of the types of securities the fund buys. Shares are sold or redeemed at the net asset value, or NAV, which is calculated at the end of each trading day. The NAV is the value of all securities in a fund portfolio divided by the number of shares. The result is the price for one share of that particular mutual fund. Mutual funds are not traded on stock exchanges. Shares are bought and sold through the investment company.
  
  

Organization of a Mutual Fund

• The organizational structure of a mutual fund begins with the shareholders and the Board of Directors or Trustees. Six departments commonly report to the Board, including the investment adviser, the principal underwriter, which is the department that sells shares directly to clients or through brokers; the fund administrator, the transfer agent that handles shareholder trades and documentation, the custodian that holds fund assets and the independent public accountant. The accounting firm is a separate and independent company. An investment company may outsource some of the other fund management responsibilities or handle them in-house.
  
  

Closed End Funds

• Closed end funds, sometimes called investment trusts, sell a fixed number of shares to investors when the fund is created. Investors wanting to sell their shares or buy additional ones after the initial shares have been sold trade on the stock exchange. Closed end fund shares are bought or sold at either a discount or premium to the fund's NAV. Prices vary in the same way stock prices fluctuate during the trading day.
  
  

Unit Investment Trusts

• Unit trusts, or UITs, sell securities called units representing an interest in the securities held by the trust in their investment portfolio. Shares are sold to investors and redeemed through the investment company.
  
  

Investment Companies in the Twenty-first Century

• Over 700 companies, including many based in the United States and a number of overseas firms, sell mutual funds, closed end funds and UITs to investors in the United States. Investment companies introduced exchange traded funds, or ETFs, during the 1990s. ETFs are similar to mutual funds but traded on stock exchanges. In 2009 there were 7,691 mutual funds, 627 closed end funds, 797 ETFs and 38,336 UITs registered for sale in the U.S.