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What is an Investment Company?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 September 2016
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An investment company is a business operation that holds securities issued by other companies as a means of earning returns from investments. These companies in turn issue securities to their own shareholders, who earn dividends as the investments of the company generate a return. The money to buy stocks issued by other corporations is obtained by the sale of the securities issued by the investment company to their stockholders, along with any profits generated by the portfolio of the company itself.

The basic process for an investment company involves pooling the funds received from the sale of its own shares of stock, and using those funds to secure other securities that are projected to earn a significant return within the amount of time desired. The company may choose to focus on specific types of investments associated with a given industry, or take the approach of diversifying the investments as a means of insulating itself from downturns in one particular area of the market. As with individual investors, the strategy employed by the investment company will depend greatly on the financial goals of the corporation and the amount of risk it is willing to assume in order to secure the right securities.

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As the stocks and other securities purchased by the investment company generate a return, that return provides the funding needed to pay dividends to shareholders of the corporation. As long as the assets owned by the investment company are performing well, the shareholders can look forward to a steady flow of dividends, based on the provisions that apply to the issuance of the shares. In order to maintain and even grow the amount of the dividends available to shareholders, the typical investment company will monitor the performance of its investments very closely, executing purchases and sales when and as needed to optimize the amount of return that is realized.

There are several different investment company models that are in common use today. One type is known as the open-end company. This type typically makes use of mutual funds as its primary investment strategy. A closed-end company would focus on securing closed-end funds in order to generate returns. In some situations, the company may use a varied approach that includes a combination of closed-end and mutual fund opportunities. While the concept of the investment company is found around the world, local regulations often define how the company can be organized and possibly determine what types of investment activity that the business can utilize.

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Azuza
Post 4

@JaneAir - That does sound like a lot of pressure for whomever decides what the investment company is actually going to invest in. That's what trained professionals are for though!

And on that note, I'd just like to mention that it's important to check the performance of an investment company before investing. Companies can seem nice and reputable, but all the charm in the world won't make up for poor performance!

JaneAir
Post 3

I've always wondered how investment companies work. It's actually very interesting when you think about it. The profitability of an investment company depends totally on the performance of the investments they have made!

So if they pick good investments, they make a profit, and so do their shareholders. If not, everyone suffers. Sounds like a lot of pressure for the investment company!

browncoat
Post 2

@irontoenail - I would add that it's a good idea to check up on the ethics of your investment company.

You might think you don't care about that side of it, but it's just as easy and profitable to put your money with a stock investment company that doesn't work with those who harm the environment, or run companies that use slave labor.

If everyone was scrupulous in this way, we would have a lot less suffering in the world, because companies would see that it paid to be ethical.

It's just something to think about if you are looking for an investment company.

irontoenail
Post 1

I haven't ever worked with a financial investment company myself, but my friend recently went in search of one. He had finally managed to save enough that he felt it was a good idea to invest it somewhere.

He quickly found that they can be quite pushy when it comes to singing their own praises.

If you go to talk to an investment company they will try their very hardest to get you to put your money with them. After a while, my friend got tired of going from place to place and being given a hard sell each time, so he went online instead. I would recommend that people do that before they even think about visiting the companies.

It's best to already narrow down your search to a couple of companies before making the final decision.

And don't forget to check what third parties have to say about the company as well. Not just awards and things they have won, but also reviews from clients. Good luck!

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