Investment Company: Types & Advantages

Investment Company 

An investment company is a company whose main business is holding securities of other companies purely for investment purposes. The investment company invests money on behalf of its shareholders who in turn share in the profits and losses. . Investment companies give a small investor the advantage of a full time professional investment management, and a very much wider spread of risk that it would have been otherwise possible. 

Types

There are generally three main types of investment companies:

1.    Mutual funds, or open-end management investment companies: Open-end funds (also called mutual funds) which have a floating number of issued shares, and sell or redeem their shares at their current net asset value (NAV). Mutual fund is a professionally managed collective investment schemes. A mutual fund pools money from many investors into a pool, and invests in investment securities, such as stocks, bonds, other mutual funds, securities, commodity (precious metals), or a combination of all. Generally, the mutual fund will have a fund manager that trades the fund’s investments in accordance with the investment objectives as set by the firm.

2.    Closed-ended funds, or closed-end management investment companies: Closed-end funds (also called investment trusts) which can sell only a fixed number of shares which are traded on stock exchanges, usually at a discount to their net asset value. Closed-ended funds are investment strategies with limited number of shares. Shares are not usually redeemable for cash or securities except until the fund is liquidated, and new shares are rarely issued once the fund was launched.

3.    Unit investment trusts, or UITs: Unit investment trusts (also called unit trusts) which sell their redeemable securities (called units) which represent interests in the securities held by the trust in its investment portfolio UITs are created for a specific time limit with a fixed portfolio – the UIT securities will not be sold or new ones will not be bought, except in certain limited situations. The portfolio may contain several different types of securities, with the two main types being stock trusts (equity) and bond trusts (fixed income). Brokers sell UITs directly to investors, and are created by a sponsor. UITs have a set life.

The benefits

Investment companies, being collective investment funds, have several benefits for investors, including the below:

1.    Allow you to pool your money

When you purchase shares in an investment company you pool your money with all the other investors' money, providing potential economies of scale in terms of dealing costs and administration.

2.    Allow you to spread your risk

 
Each investment company owns shares in a range of investments; so buying shares in only one Investment Company effectively gives you a diversified portfolio. As you are not dependent on the success of just one or two investments, this spreads your risk.

3.    Use professional managers' expertise

 
Each investment company uses professional management expertise.

4.    Allow you to invest small amounts

 
You can invest small lump sum amounts or even invest monthly. Most companies are available through savings schemes run by their managers.