An investment company is a financial services firm that holds securities of other companies purely for investment purposes. Investment companies come in different forms: exchange-traded funds, mutual funds, money-market funds, and index funds. Investment companies collect funds from institutional and retail investors, and are entrusted with making investments in financial instruments according to the strategies that were previously agreed with the investors.
Investment companies collect funds by issuing and selling shares to investors. There are basically two types of investment companies: close-end and open-end companies. Close-end companies issue a limited amount of shares that can then be traded in the secondary market--on a stock exchange--whereas open-end company funds, e.g. mutual funds, issue new shares every time an investor wants to buy its stocks.
Invest in Financial Instruments
Investment companies invest in financial instruments according to the strategy of which that they made investors aware. There are a wide range of strategies and financial instruments that investment companies use, offering investors different exposures to risks. Investment companies invest in equities (stocks), fixed-income (bonds), currencies, commodities and other assets.
Pay Out the Profits
The profits and losses that an investment company makes are shared among its shareholders. Depending on the type--close-end or open-end--and the structure of the investment company, investors can redeem their shares for cash from the company, sell the shares to another firm or individual, or receive capital distributions when assets held by the investment company are sold.