A Complete Guide to Investment Companies

The term investment companies refers to financial organizations whose primary business activity is to hold as well as manage financial securities. These are essentially partnerships, corporations or trusts that simply ‘pool’ the money from shareholders and then invest them in appropriate security vehicles thereby multiplying investment money. These investment companies can be privately or publicly owned, but how do they work? In order to understand that, you need to be aware of some of the features of investment companies. Let’s take a look:

Close-ended structure

Investment companies are known to have a close-ended structure and this means that a fixed number of shares are issued by these companies in a specific time-frame. The shares of investment companies can also be traded on the stock market. In this particular structure, the funds are invested by managers in less liquid assets such as venture capital, commercial properties and private equity for delivering long-term and consistent results.

Board of directors

All investment companies have an independent board of directors and their main role and responsibility is protecting the interests of their investors. Meetings are conducted by the board of directors a few times each year for reviewing the performance of the investment company and offering advice.

Stock exchange listed

Investment companies can only operate if they are listed on the stock exchange. It is possible for these companies to be listed on multiple exchanges at a time.

Shareholder rights

When you purchase shares in investment companies, it means that you will be given certain rights that can be exercised if and when you want or need. As a shareholder, you have the right to participate in the Annual General Meeting (AGM), change or select the board of directors, motion extraordinary general meetings (EGM) and motion tables.

Multiple share classes

The business model of investment companies doesn’t have to be similar. Some of these investment companies can issue ordinary shares whereas multiple classes of shares can be issued by a split capital investment company. The former model is followed by traditional investment companies in which shareholders can get dividends for a long period of time. The latter model is one in which the money is invested in numerous instruments by fund managers for generating substantial income for the shareholders.

Select investment

Investment companies have complete rights to decide where they wish to invest the money of their shareholders. They have the option of investing in any segment such as various companies, business sectors and global companies or can also make an investment in a specific geographical region. There are special investment companies like venture capital trusts, hedge funds, private equities and property investment companies for handling selective investment models. Sometimes, investment firms can also invest their funds in other investment companies if they wish.

Fund management

The task of choosing fund managers is entrusted to the board of directors of investment companies. The fund managers are given the responsibility of deciding the day-to-day management of funds and deciding what to buy or sell. The fund managers belong to an external management group and they are hired to function in an investment company. The notable thing is that they are not limited to a single investment institution. Small investment companies are often self-managed because in-house fund managers are directly hired by the board of directors.

Investment gearing

The process where money is borrowed from the outside by investment companies for making additional investments is called ‘gearing’. The purpose of these investments is to return the money of shareholders along with dividend and also make profits. These borrowed funds are invested in long-term investment plans or attractive stocks. Furthermore, another advantage to investment companies is that they borrow at a lower interest rate as compared to others. The decision to opt for ‘gearing’ rests with the fund managers and the board of directors.

These are the basic features you will find in investment companies, but you should know that there are different types of these companies that can be found. To be specific, there are four types of investment companies that offer their financial services and they are highlighted below:

Exchange Traded Funds (ETF)

It is either an open-end investment company or an Unit Investment Trust (UIT) where the shares are traded on the stock exchange at market prices in intra-day format. Professional management is maintained by ETF along with a diversified portfolio and they conduct trading in the market like equity security.

Unit Investment Trust (UIT)

These investment companies purchase and manage a fixed portfolio that comprises of stocks and bonds. They are managed externally because the shares are sold to investors who keep holding onto them and in return receive dividends from the investment companies. A date of expiry is mentioned on the share units, depending on the nature of the investment vehicle.

Closed-End Fund

These are the investment companies in which a specific number of shares are issued in the stock market and they offer long-term benefits, even if they are less liquid. These companies are externally managed and their objectives are underlined clearly.

Mutual Funds

Similarly to closed-end funds, external management is also used for mutual funds. These funds can be redeemed at any point in time. In these investment companies, security portfolios are bought by a professional investment adviser for reaching a specific financial goal on behalf of the investors.

There are a number of investment companies that exist in the market these days and they are quite successful. As a matter of fact, some of them are quite notable in their own fields. Some of the most popular ones are Goldman Sachs, Morgan Stanley, JPMorgan Chase & Co., Bank of America Merrill Lynch, Deutsche Bank AG, Citigroup Inc., Credit Suisse Group, Barclays Investment Bank, UBS AG and HSBC Holdings PLC.

Knowing about how investment companies’ work is essential for those considering a career in investment banking or those who wish to make an investment and are exploring their options.