Investment company

An investment company exists to give small investors access to a professionally selected, diversified portfolio they could not assemble on their own. Investors buy shares or units in the company, and each investor owns a proportional slice of everything the pool holds rather than any specific security.

The Investment Company Act of 1940 recognizes three categories. A face-amount certificate company sells certificates promising a fixed sum at a future date. A unit investment trust (UIT) holds a fixed, unmanaged portfolio and issues redeemable units, with no board of directors and no investment adviser. A management company — by far the most common — hires an investment adviser to run an actively or passively managed portfolio, and comes in two forms: open-end (mutual funds, which continuously issue and redeem shares at net asset value) and closed-end (a fixed share count that trades on an exchange at a market-driven price).

Management companies are further classified as diversified or non-diversified. To call itself diversified, a fund must satisfy the 75-5-10 rule: at least 75% of assets must be invested such that no more than 5% sits in any single issuer and the fund owns no more than 10% of any issuer's voting shares. The remaining 25% is unrestricted.

Investment companies are heavily tested across the securities exams. The Series 6 and Series 7 cover the rules governing investment company communications with the public, while the Series 65 and Series 66 cover pooled investment characteristics and how investment advisers to these funds register. Know the three statutory types, the open-end versus closed-end distinction, and the diversification test.