Econ Stock & Investments Quiz 3

Investment Company

A firm that pools money from individual investors and invests those funds in a portfolio of securities.

Mutual Fund

An investment company in which investors buy shares representing an ownership interest in the fund's portfolio.

Who owns a mutual fund?

The fund's shareholders.

Shareholder

An investor who owns shares in the fund and therefore owns part of the mutual fund.

Investment Adviser

The party that manages a mutual fund's portfolio.

Board of Directors (mutual fund)

Provides oversight of the fund; the investment adviser manages the portfolio.

Open-End Fund

A fund that stands ready to issue and redeem shares at any time; shares outstanding change as investors buy or redeem.

Closed-End Fund

A fund with a generally fixed number of shares that trades in the open stock market; supply and demand help set its price.

Shares outstanding: open-end vs. closed-end

Open-end: change as investors purchase or redeem shares. Closed-end: generally fixed.

How investors sell: open-end vs. closed-end

Open-end: redeem shares directly with the fund. Closed-end: sell shares to other investors on an exchange.

Share pricing: open-end vs. closed-end

Open-end: transactions based on NAV, plus applicable fees or sales charges. Closed-end: market price can be above or below NAV.

Open-end fund redemption price

The next calculated NAV.

What determines a closed-end fund's share price?

Supply and demand in the open market.

Net Asset Value (NAV)

The value of a fund's net assets per share.

NAV formula

(Total Assets − Total Liabilities) ÷ Shares Outstanding

Premium

Market price is above NAV.

Discount

Market price is below NAV.

NAV $25.00, exchange price $23.50

Shares are purchased at a discount to NAV.

Clue that a fund is closed-end

Its market price differs from its NAV.

Other investment that can trade at a premium or discount to NAV

Exchange-traded funds (ETFs).

Three key advantages of mutual funds

Low initial investments, professional management, and diversification.

Low Initial Investments

Investors can begin with a relatively small amount of money; minimums vary by fund.

Professional Management

Investment professionals research securities and manage the portfolio; it does not guarantee superior returns.

Diversification

Spreading money across many holdings, reducing dependence on any single investment; reduces certain risks but does not eliminate the possibility of losses.

Market Capitalization (Market Cap)

A measure of a company's stock market value: Stock Price × Shares Outstanding.

Fund size category (small-cap / large-cap)

Describes the market capitalization of the companies the fund invests in, not the fund's total assets or NAV.

Small-Cap Fund

Invests in companies with smaller market capitalizations; emphasizes potential for capital appreciation.

Small-cap companies: general characteristics

Often less established, with greater business uncertainty and stock-price volatility.

Large-Cap Fund

Invests in companies with larger market capitalizations; may emphasize growth, dividend income, or both.

Large-cap companies: general characteristics

Often more established, though still subject to investment risk.

Fund with billions in assets that invests in smaller companies

Still a small-cap fund; size category refers to the companies held.

Capital Appreciation

An increase in the value of an investment.

Current Income

Payments received while holding an investment, such as stock dividends.

Index Fund

A fund that seeks to track the performance of a specified market index.

Passive Management

Following an index rather than selecting investments with the goal of outperforming it.

Index funds vs. actively managed funds

Index funds generally have lower management expenses and less trading.

Exchange-Traded Fund (ETF)

Typically an index fund that trades like a closed-end fund; bought and sold on an exchange throughout the trading day, and its price can differ from NAV.

Money Market Mutual Fund

An open-end fund that invests in short-term debt obligations, such as Treasury bills and other money market instruments.

What distinguishes a money market mutual fund?

Its holdings of short-term debt, as opposed to stocks or longer-term bonds.

Investment Advisory Firm

A firm that earns fees for managing mutual funds; services can include investment research, record keeping, and marketing.

Investment Research

Evaluating securities and investment opportunities.

Record Keeping

Maintaining fund and shareholder records.

Marketing (advisory service)

Promoting the fund and attracting investors.

Regulated Investment Company

A qualifying investment company that passes investment income through to shareholders and generally avoids fund-level federal income tax on qualifying distributed income.