Unit 8 Investment Companies
Inverse (Reverse) Funds
attempt to deliver returns that are the opposite of the benchmark index they are tracking. Investor is Bullish
Fixed-Time
customers liquidate their holdings over a fixed period
Target-Date Fund (life cycle funds)
designed to manage investment risk. This is done by selecting a find with a target date that is closest to the year an investor anticipates needing the money
Fixed Percentage
either a fixed number of shares or a fixed percentage of the account is liquidated each period
Bond Funds
h=Have income as their investment objective They pay dividends Paid quarterly or semiannually Price and interest rates have and inverse relationship
Corporate Bond Funds
have a higher credit risk than various government issues but can still be classified as investment grade.
Small Cap funds
invest in companies with less than 2 billion capitalization
Mid Cap Funds
invest in companies with total capitalization of $2 to $10 billion
Option Income Funds
invest in securities on which options can be written and earn premium income from writing options
Global Funds
invest in securities worldwide, including the United States
Balanced Funds (Hybrid Funds)
invest in stocks for appreciation and bonds for income. 60% stocks 40% bonds
International Funds
invest strictly in foreign securities (not the united states)
Investment company
is a corporation or trust through which investors may acquire an interest in large, diversified portfolios of securities by pooling their funds with other investors funds and buying shares or units of the fund
Selling Dividends
is the prohibited practice of inducing customers to buy mutual fund shares by implying that an upcoming distribution will benefit from them.
Growth and Income Fund
may attempt to combine the objectives of growth and current income by diversifying its stock portfolio among companies showing long term growth potential and companies paying high dividends
Reinvestments of mutual fund dividends
are at the NAV with no sales charge.
Blend/Core Funds
are stock funds with a portfolio comprising a number of different classes of stock. Include both blue-chip stocks and high-risk/high - potential - return growth stocks
No prospectus
Closed-End Investment Company
Price by Supply and Demand
Closed-End Investment Company
Secondary Market
Closed-End Investment Company
Share are not redeemable
Closed-End Investment Company
Investment Company Act of 1940
Congressional legislation regulating companies that invest and reinvest in securities. The act requires an investment company engaged in interstate commerce to register with the SEC.
Combination Privilege
A benefit offered by a mutual fund whereby the investor may qualify for a sales charge breakpoint by combining separate investments in two or more mutual funds under the same fund family
Reinvestment of Distributions
The automatic reinvestment of distributions is similar to compounding interest.
No secondary market trading
Open-End Investment Company (mutual fund)
Price by Formula (NAV)
Open-End Investment Company (mutual fund)
Prospectus required
Open-End Investment Company (mutual fund)
Class A shares
(1) A class of Mutual fund shares issued with front end sales load. (2) Shares of a company that have differing characteristics from other classes of stock Sales charge = 8.5% of POP Sales charge is always quoted as a percentage of POP Long term investment NAV+SC=POP
Public offering price (POP)
(1) the price of new shares that is established in the issuing corporations prospectus. (2) the price to investors for mutual fund shares, equal to the net asset value plus the sales charge the maximum sales charge the fund distributor can assess.
Special Situation Funds
- buy securities of companies that may benefit from a change within companies or the economy (high risk)
Face Amount Certificate
-a contract between an investor and an issuer in which the issuer guarantees payment of a stated (or fixed) sum to the investor at some set date in the future
Mutual Fund Benefits
1. Choice of objectives 2. Convince 3. liquidity - Redeemed at NAV 4. Minimum Initial Investment 5. Automatic Investment withdrawal 6.Convenient Tax Information 7. Combination privilege's 9. Exchange within families 10. Leverage and inverse Funds
Closed End Fund Benefits
1. Exchange traded 2. Pricing- based on supply and demand 3. Leverage- they can issue bonds
UIT Benefits
1. Income 2. Liquidity 3. Rolling over Proceeds
ETF Risk
1. Index Risk 2. Tracking Risk
UIT Risk
1. Market Risk 2. Interest Rate Risk
Mutual Fund Risks
1. Market Risk 2. Interest Rate Risk 3. Net Redemptions-unique 4. Expense Risk 5. Tenure Risk
Closed End Fund Risk
1. Pricing Risk 2. Leverage Risk
Prohibited Activities (Mutual Funds)
1. Purchase ant security on margin 2. Participate on a joint basis in any trading account in securities 3. Sell any security short 4. Acquire more than 3% of the outstanding voting securities of another investment company
ETF Benefits
1. Taxation-only capital gains or losses 2. Expense Ratio - low 3. Portfolio Specialty 4. Exchange traded 5. Leverage Inverse ETFs
Differences between ETF and Mutual Fund
1. intraday trading investors do not have to wait until the end of a trading day to purchase or sell shares. ETFs trade and are priced continuously throughout the day, making it easier for investors to react to market changes 2. Margin eligibility- EFTs shares can be purchased on margin, subject to the same terms that apply to stock 3. Short Selling - EFTs can be sold short at any time during trading hours
Expense Risk
Sales charges, 12b-1 fees, and possible redemption fees management fees Tax efficiency
Growth funds
A diversified common stock fund that has capital appreciations as its primary goal. It invests in companies that reinvest most of their earnings for expansion, research, or development
Voluntary Accumulation Plan
A mutual fund account where the investor commits to depositing amounts on a regular basis, in addition to the initial sum invested.
Gift Rule
A restriction on gifts of material value that a firm may give to another firm's employees (generally less than $100)
Anti-Reciprocal Rule
A rule created by the Financial Industry Regulatory Authority (FINRA) to protect individual investors from conflicts of interest that may arise when brokerage firms and mutual funds collaborate.
redeemable security
A security that the issue redeems upon the holders request. EX open end investment company, Treasury notes
Dollar Cost Averaging
A system of buying mutual fund shares in fixed dollar amounts at regular fixed intervals, regardless of the share's price. The investor purchases more shares when prices are low and fewer shares when prices are high, thus lowering the average cost per share over time. Market price goes up, Fewer shares are purchased Market price goes down, More shares are purchased 401(k) is an example of DCA
Net Redemptions
An excess of shareholder redemptions over new shares purchase. The portfolio manager has to decide which assets to liquidate when prices are fallingSa
Rights of Accumulations
Allow an investor to qualify for reduced sales charge by reaching a breakpoint 1)Allow the investor to use prior share appreciation and reinvestment to qualify for breakpoints 2) Do not impose time limits
Exchange Privileged
Allows the investor to convert an investment in one fund for an equal investment in another fund in the same family at NAV without incurring an additional sales charge Considered a sale for tax purposes. Any gains or losses are fully reportable at the time of the exchange
Exchange Traded Fund (ETF)
An investment company legally classified as an open-end company or unit investment trust. An ETF issues shares in large blocks that are known as creation units. Those who purchase creation units are frequently large institutional traders or investors. The creation units can then be split up and sold as individual shares in the secondary markets, allowing individual investors to purchase shares.
Unit Investment Trust (UIT)
An investment company that sells redeemable shares in a professionally selected portfolio of securities. It is organized under a trust indenture, not a corporate charter. Shares (units) must be redeemable by the trust. DO NOT: 1. they are unmanaged 2. have board of directors 3. Employ an investment adviser 4. Actively manage their own portfolios
Regulated Investment Company (RIC)
An investment company to which Subchapter M in the Internal Revenue Code grants special status that allows the flow - through of tax consequences on a distribution to shareholders Must distribute 90% of its NII
Management Investment Company
An investment company, either open or closed, that trades various types of securities under the direction of its portfolio manager, in a accordance with specific objectives stated in the prospectus DOES not include holding companies
75-5-10
At least 75% of the fund's total assets must be invested in cash and securities that are not issued by the fund or any of its affiliates. Within that 75%, no more than 5% of the fund's total assets can be in a single stock. Within that 75%, no holding can represent more than 10% of the voting control of a single company.
Diversified management company
As defined by the Investment Company Act of 1940, a management company that meets certain standards for percentage of assets invested. These companies use diversification to manage risk. 75-5-10 test.
12b-1 fees
Asset based distribution fees. Pays for marketing & distributing fund to investors & reps to service the accounts, not fund mgmt
Commissions
Closed-End Investment Company
EX-date is determined by FINRA
Closed-End Investment Company
Issues Common stock, Preferred stock, or bonds
Closed-End Investment Company
Noncash compensation
Cannot exceed 100
Board of Directors (BOD) Mutual Funds
Cannot have a BOD that consist of more than 60% of persons who meet the definition of interested persons of the investment company
Taxation on Reinvested Distributions
Distributions are taxable to shareholders whether the distributions are received in cash or reinvested. Dividends is constructively received in the taxable year during which it its credited to his account or otherwise made available. Uses Form 1099 DIV
Benefits of Investment Company Securities
Diversification Professional Management
Class B Shares
Do not charge front end sales charge, but they do impose a back end charge for early redemption of shares.
Undivided interest in the fund
Each mutual fund shareholder owns an undivided interest in the investment company's portfolio. Because each share represents one class of voting stock, the investor's interest in the fund is reflected by the number of shares owned.Fbu
Open-End Investment Company (mutual fund)
Ex-date determined by Board of Directors
Expense Ratio
Expresses the management fees and operating expenses as a percentage of the funds net assets. Operating expenses / average dollar value of the funds assets under management Sales charge is not an expense
Value Funds
Focus on companies whos stocks are currently undervalued. Expected to perform better than the reports indicate, thus providing an opportunity to profit. High dividend yields. More conservative than growth
No - Load Funds
Fund does not have charge any type of sales load. Permitted to charge redemption fees. 12b-1 fees cannot exceed .25 of the funds average annual net assets
Class C Shares (Level Load)
Have one year, a .755 12b-1 fee and 25% shareholder service fee. Appropriate for investors who have a short time horizon.
Changes to investing policies
In order for an investment company's board to make fundamental investment policies changes, a majority vote of the outstanding voting stock is required.
Index Funds
Invest in securities to mirror a market index, such as the S&P 500.
Market Capitalization
Is the total number of outstanding shares of a company's stock multiplied by the stock price
Specialized (Sector) Funds
Minimum of 25% of their assets invested in their specialties. Offer high appreciation potential, but may pose higher risks to the investor as a result of the concentration of investments. Speculative
Tax - Free Bond funds and UITs
Municipal Bond Funds and UITs invest in municipal bonds or notes that produce income exempt from federal income tax.
Periodic and Other Reports
Must file annual report with the SEC. They contain audited balance sheet and income statement. Shareholders must be sent financial information Semiannually
Size if investment companies
Net worth of at lease 100,000
Sales agreement
No member firm may purchase mutual fund shares from a client at a price lower than the NAV next quoted for the shares.
Money Market Funds
No-load, open-end mutual funds that serve as temporary holding tanks for investors who are most concerned with liquidity not insured by FDIC
Agency Security Funds
Not considered quite as safe from default risk as US Government securities, the yields on agency security funds will be higher
Principal Protected Mutual Funds
Offer investors a guarantee of principal, adjusted for fund dividends and distributions, on a set future date while providing opportunities for higher return through investment in higher risk and higher expected return asset classes such as equities.
Forward Pricing
Open end investment companies must compute their NAV per share at least once per day as of close of the markets
8 1/2 Maximum sales charge
Open-End Investment Company (mutual fund)
Continuous Public offering
Open-End Investment Company (mutual fund)
Issues common stock only
Open-End Investment Company (mutual fund)
Must redeem shares
Open-End Investment Company (mutual fund)
Government Sponsored Enterprises (GSEs)
Organizations created by the federal government to help increase loan opportunities for homebuyers.
NAV/ 100% - sales charge % = POP
POP with sales charge percentage
Unrealized gain
Paper profit
Tenure Risk
Past performance is not a guarantee for future results.
Ask Price
Price the investor is will to buy, Price the dealer is willing to sell
Bid price
Price the investor is willing to sell Price the dealer is willing to buy
FINRA Rule 2341
Prohibits its members who underwrite find shares form assessing sales charge in excess of 8 1/2 %
High - Yield Funds
Provide the highest yields because of their increased credit risk and are considered speculative investments
U.S. Government Funds
Purchase securities issued by the US Government or an agency. Current income and maximum safty
POP - NAV = sales charge ($ amount)
Sales Charge Dollar Amount
Sales charge ($ amount)/ POP = sales charge %
Sales Charge Percentage
Closed-End Investment Company
Shares fixed
Asset Allocation Funds
Split investments between stocks for growth, bonds for income, and money market instruments or cash for stability.
Equity Income Funds
Stress current income over growth. Investing in the stocks of companies with long histories of dividend payments, such as Utility company stocks, blue chip stocks, and preferred stocks
Qualified Dividends
Taxed at the lower longer term capital gains rate
Fixed Dollar
The fund liquidates enough shares each period to send that sum. The amount of money liquidated may be more or less than the account earnings during the period
Leveraged ETF
The funds attempt to deliver a multiple of the return of the benchmark index they are designated to track
ETN
The long term expected value of your ETN is zero. IF you hold your ETN as a long term investment, it is likely that you will lose all or a substantial portion of your investment
Market Risk
The potential for an investor to experience losses owing to day-to-day fluctuations in the prices at which securities can be bought or sold.
Price Risk
The potential that the value of a currency or commodity will change between the signing of a delivery contract and the time delivery is made. The futures markets serve to manage price risk.
Business Development Company (BDC)
The purpose was to create a new vehicle to aid in the promotion and development of small business. A closed end investment company regulated under the investment company act of 1940. it does not have the flexibility of regular closed-end funds because at least 70% of its assets must be invested eligible assets. income distributions are made dividends
Breakpoint Sale
The sale of mutual fund shares in a amount just below the level at which the purchaser would qualify for a reduced sales charge. Violates the conduct rules
Breakpoints
The schedule of sales charge discounts a mutual fund offer for lump-sum or cumulative investments. Breakpoints are available to any person. Investment clubs or associations formed for the purpose of investing do not qualify for breakpoints
Net Investment Income
The source of an investment company's dividend payments. It is calculated by subtracting the company's operating expenses from the total dividends and interest the company receives from the securities in its portfolio. NII=dividends + interest - expenses of the fund NO Capital gains
Tracking Risk
The standard deviation of the differences between a portfolio's returns and its benchmark's returns; a synonym of active risk. Also called tracking error.
interval funds
Type of Closed End fund. 1. Do not trade in the secondary market 2. at certain interval, which may be anything from monthly to annually, investors are allowed to sell a portion of their shares back to fund at NAV 3. suitability, long time horizon 4. Can take certain liquid position
Aggressive Growth Funds (performance funds)
Willing to take greater risk to minimize capital appreciation.
back-end load
a Fee that is charged when mutual fund shares or variable annuity contracts are redeemed. It is typically found in Class B shares. It declines annually, decreasing to zero over an extended holding period - up to 8 years.
Large Cap Fund
a company with a market capitalization value of more than $10billion.
Backdating the Letter
a fund often permits a customer to sign a letter of intent as late as the 90th day after an initial purchase. The LOI may be backdated by up to 90 days to include prior purchases but may not cover more than 13 months in total
Conduit
a means for an investment company to avoid taxation on net investment income distributed to shareholders. If a mutual fund acts a conduit for the distribution of net investment income, it may qualify as regulated investment company and be taxed only on income the fund retains
Front-end Load
a mutual fund commission or sales charge that is included in the purchase price
Letter of Intent (LOI)
a nonbinding agreement between a purchaser of mutual funds and the fund underwriter that allow the investor up to 13 months to reach a specified dollar purchase
Realized gain
actual profit made No more than annually
Non-Qualified Dividends
taxed as ordinary income
Net Asset value (NAV)
the daily computation of the value of a mutual fund that is reached by deducting the funds liabilities from the closing market value of all of its shares and then dividing by the number of outstanding shares Fund NAV/Number of outstanding shares
Leverage Risk
the risk that losses in asset values cannot be offset with reduced liabilities.
Interest Rate Risk
the systematic risk associated with investments, relating to the sensitivity of price or value, to fluctuations at the current level