by englisharticles .info
A type of financial enterprise engaged in the business of investing in securities. In general, investment trusts sell their owjn securities to the public and use the proceeds to acquire a portfolio of other securities. The income of an investment trust consists of interest and divi¬dends on the securities it owns, to which may be added or subtracted profits or losses on sale of securities. From this income, after expenses of operation, dividends are paid on the shares of the trust. The basic economic functions of the investment trust are to provide diversification and, usually, management of investments for the small investor, who does not have enough funds to spread his investment risks eco¬nomically over a large number of securities and who fre¬quently also lacks the time or ability to select and supervise his investments properly. These needs are met in principle by the investment trust. By assembling funds from many investors, such an institution is able to invest in a diversified portfolio of securities, and by employing investment experts it is able to provide skilled management. Of course, the effective performance of these functions may vary from time to time and among different investment trusts.
Although investment trusts originated in England and Scotland in the latter part of the 19th century, their history in the United States dates only from the early 1920′s. During the great “bull market” of that decade, investment-trust securities became highly popular with American investors, and a large number of trusts of many varieties were organized. The stock market crash of 1929 and the depression of the 1930′s brought the inevitable reaction. Many trusts were liquidated or were merged with others. Furthermore, various abuses and undesirable practices in the promotion and management of invest¬ment trusts came to light. An investigation by the Securities and Exchange Commission provided the basis for enactment in 1940 of the Investment Companies Act, which established federal regulation of investment trusts by the Securities and Exchange Commission. Previously, the Revenue Act of 1936 had established certain conditions under which investment trusts were exempted from the federal corporate income tax. This legislation did much to establish the basic pattern of operation for a large segment of the investment-trust business. The lessons of experience plus federal regulation have resulted in substantial correction of the earlier faults of investment trusts, and they have emerged as a reputable and well-regarded type of financial institution.
Although there are several variations of the basic principle of the investment trust, the management type became by far the most important during the period of development following the depression of the 1930′s. Its essential characteristic is that the directors or trustees exercise broad discretion in the investment of the trust assets, subject only to general restrictions provided in the charter. Investment policies vary widely. Broad diversification is the usual policy, but some invest largely in stocks, some largely in bonds, and some divide their commitments between these two general classes of securities. A few confine themselves to stocks of a single industry. Some place emphasis upon a stable income from the portfolio, and others seek appreciation in the value of their investments.
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