FINM2003 Study Guide - Final Guide: Investment Company, Mutual Fund
Short-selling
This is the selling of borrowed shares with the intention of profiting from an expected decline
in the share’s price.
The investor borrows shares through a dealer, sells the borrowed shares and closes the
position by purchasing and returning an equivalent number of shares at a later date
Investment companies
Investors have the option of directly trading securities
They will often outsource responsibility for investment decision-making to professional
investors and investing indirectly through investment companies is appealing given the
promise of professional management. This is because investors perceive that professional
managers have superior skills, experience and access to assets.
Also the promise of large-scale investing allows investors to hold fractional shares in
multiple securities and so enjoy diversification. Investment companies enjoy brokerage and
commission discounts by trading in bulk, and also administrative support and record
maintenance.
Managed investment companies
The portfolios of managed investment companies are managed, can be categorised as:
1. Open-end funds or mutual fund, where investors can exit by simply selling shares
back to the fund or
2. Close-end funds: these funds do not redeem or issue shares, meaning investors can
only exit by selling their shares to other investors.
Other organisation types
Hedge Funds: allow wealthy individuals or institutions to pool assets that are collectively
invested by a professional manager. Funds are typically structured as private partnerships,
escaping heavy regulation, and often involve lock-up periods, with these features facilitating
investment in a wider range of assets.
Mutual Funds
The common name for open-end investment companies, are the dominant type of investment
company. Funds are often classified based on their investment policy, which defines the type
of assets they invest in. Common examples include: equity funds, bond funds, and index
funds.
Exchange Traded Funds
This allows investors to trade index portfolios in the same manner they do shares. ETFs can
be traded throughout the day unlike mutual funds. It can track broad indexes or be
commodity-based, can be short-sold or purchased on margin, have tax advantage over mutual
funds and enjoy low management and transaction fees.
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Document Summary
This is the selling of borrowed shares with the intention of profiting from an expected decline in the share"s price. The investor borrows shares through a dealer, sells the borrowed shares and closes the position by purchasing and returning an equivalent number of shares at a later date. Investors have the option of directly trading securities. They will often outsource responsibility for investment decision-making to professional investors and investing indirectly through investment companies is appealing given the promise of professional management. This is because investors perceive that professional managers have superior skills, experience and access to assets. Also the promise of large-scale investing allows investors to hold fractional shares in multiple securities and so enjoy diversification. Investment companies enjoy brokerage and commission discounts by trading in bulk, and also administrative support and record maintenance. Hedge funds: allow wealthy individuals or institutions to pool assets that are collectively invested by a professional manager.
