Investment companies outline

investment companies

• purpose: get many small investors to buy securities
• buy stocks, bonds, money market instruments

Investment company act of 1940,

• $100,000 capital minimum
•  100 shareholders minimum

Nonmanaged

•  many investors, 
• not actively managed

 Managed

•  actively managed by an adviser

 Unit Investment Trusts

• a)issue trust certificates with stake in muni bonds, corporate bonds, stock 
• b)sell units in specific investments 
• c)trust indenture-outlines obligations to manager of trust 
• d)have termination date-can be 50 years or more e)no Board of Directors, no managers f)have trustees

Exchange Traded Funds

• a)open end unit investment trusts aka SPDRs 
• b)open end investment companies 
• c)follow index like foreign companies or sectors 
• d)indexes-Dow Jones Industrial Average, Nasdaq 100 index, S&P 500 index
• shares bought on stock exchange floor-new issues and secondary issues
• no sales charge
• commission charge
• prospectus, with new shares
• secondary exchange, no prospectus
• can be bought on margin
• sell shares at net asset value
• sell shares at market price of ETF
• must buy 50,000 shares of stock
• index not changed much
• can be redeemed by institution that sponsored ETF
• can be sold short
• buying-weighted by index or weight by capitalization
• mutual funds have more turnover
• creation unit, inside SPDRs create in trust with 50,000 shares
• institutional investors may buy whole creation unit
• ETF owners can get dividends-small
• performance from ETF>dividend
• close trading at 4pm
• closing prices shown in newspapers

 Leveraged ETF

• leverages buying another fund that mirrors index
• use investor $ + borrowed money
• borrowed to investment 2:1 or 3:1 ratio
• hope investments>interest cost
• 2 or 3x returns as index
• requires borrowing-has its disadvantages 
• $ in short term securities and small amont of derivatives
• cash used to meet derivative obligations
• fees for management-managing securities
• interest costs on borrowed $
• transaction costs-borrowing and selling of securities
• for sophisticated investors
• for short term investments
• have a professional managing investments
• use leverage to try and make more
• not for a person who cannot tolerate large losses in a short time

Inverse ETF

• sell index fund shares short a)equity swaps b)buy/sell derivatives
• perform inverse from index
•  hedge portfolio against falling prices
• S&P 500 down 10%, ETF up 10%
• short sales, risky-sold stock must be bought again at a high price-could be a large loss
• short sale on a few stocks, loss spread amongst investors
• are managed
• buy and sell frequently
• fees can reduce profits
• bought in rising/increasing market
• sold in falling/decreasing market
• frequent buying/selling creates some volatility loss
• compounding error, losses cut into profits in volatile market
• not for a person who cannot handle large losses in s short time
• not long term investments