The monetary financial system - Essay Example

However, these investments have a downside risk of underperformance and lack of control etc. There are two types of collective investments: open ended investments and closed ended investments. In the open ended investments the number of shares or units is not fixed and the fund can issue unlimited amount of shares/units. However, as the name suggests, in closed ended investments the number of shares or units issued is fixed. The unit trust and investment trust are examples of collective investment institutions with certain notable differences which are explained as follows.

    ‘An investment in unit trusts is a method whereby a small investor can form part of the share market without being directly involved.’ (Swart, 2007, p.153) ‘In contrast to unit trust, investment trusts are public limited companies whose business is the investment of funds in financial assets.’ (Buckle and Thompson, 1992, p.125)  Both the unit trust and the investment trusts are pooled investments that aim towards diversification of risk for the investor. The individual investor benefits from the knowledge and expertise of the trust managers for which the trust charges fees to its unit holders in the form of annual charges.

Financial institutions and intermediaries play an important role in the management of the unit and investment trusts. .   The unit trusts have been more popular in the past with investors preferring open ended units as opposed to closed ended in the case of investment trusts. Investment trusts are allowed to borrow for investment, however, this facility is not present with the unit trusts. Unit trust is managed by a trustee where the investment trust is a company listed on the exchange. In terms of pricing, unit trusts are always valued on their net asset value (NAV) whereas investment trust can trade both at a premium or discount to their NAV.

 Thus demand and supply forces have no consequences on the unit trust but affect the prices of the investment. The unit trust issues unit which are not tradable to the third party whereas due to the listing on the stock exchange, investment trusts’ units are tradable. In terms of the fee structure, the investment trust charges as lower as compared to the unit trust.   Thus, with the above mentioned similarities and differences, it is up to the investors’ analysis and nature to choose between unit trust and investment trust.   2. Firms could raise long term finance issuing shares and bonds.

Evaluate the pros and cons of each? Companies need to generate funds on long term basis in order to operate in the market. The two basic options for raising equity from the market are: bonds and shares. The bond is a long term debt instrument with fixed interest payments issued by the issuer or the borrower of the funds which can be the government or any company. The bondholders are entitled to the fixed interest payments along with the return of their principle. They do not hold the right to own the company and are the first ones to be paid off at the time of bankruptcy.

When the company issues shares for