 Welcome to the session. This is Professor Farhad in which we would look at investment companies and net asset value or NAV. The topic is covered in an essentials or principles of investment course, whether graduate or undergraduate. As always, I would like to remind you to connect with me only then if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance, as well as Excel tutorial. If you like my lectures, please like them, share them, put them in playlist. If they benefit you, it means they might benefit other people connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources to supplement your accounting as well as your finance courses, CPA, CFA or CMA exam. So let's talk about investment companies. What are investment companies? Investment companies are intermediaries, financial intermediaries that collect funds. So somebody need to give them funds so investors will need to give them money and invest those funds and potentially a wide range of security. So you give them the money. This is the investment companies and usually it's a mutual fund because most investment companies take the form of a mutual fund. And what you do is they go out there, they pull this money together. The key is pulling of assets behind investment companies and they can buy a lot of different stocks because an individual, they cannot buy shares and all these stocks through an investment company. They can do so. In each individual, each investor has a claim to the portfolio established by the investment companies in proportion of the amount invested. And that's going to be measured through something called NAV Net Asset Value will compute that shortly. These companies provide a mechanism for small investors, even one individuals to all team up together to obtain the benefit of a large scale investing. And this is the purpose of investment companies. So you give them your money and they don't buy property, plant and equipment and they start the business. They take your money and they invest your money in other securities and other companies and other assets. And this way that's how they financial assets and this is how they generate money for you. So they do provide you other other other important functions. First, they play at the record keeping and administration. That's very important. Basically, investment companies, they issue your periodic status report, what's going on with the investments, keep track of your capital gains and distribution, especially for tax purposes, your dividend, your investments, your redemption. Every time they buy, they sell, they have to let you know about this and they may re-invest any dividend or an interest income for the shareholders on your behalf. They also provide you with diversification and divisibility because by pulling all this money together, they enable investors to hold fractional of a share of many different securities. So by giving your money, for example, if you give them $100, that $100 is in theory invested in so many different companies. If you have the $100 yourself, you cannot buy 10 different companies, but through the investment companies, you are invested in all these companies. So they act as a large investor, even though individual investors cannot. Also, because of the large scale, because a lot of money are pulled together, you could have professional management. So they can support full-time staff and security analysts such as CFAs, portfolio managers who attempt to achieve superior investment compared to other investors or the market. Also, as a result of the pulling, you have a lower transaction cost because they trade in large blocks of securities. They could achieve substantial savings on brokerage and commission fees. So because all this money is pulled together, you also need to find a way to divide the claim to those assets among investors. How do you do so? Because investors buy shares in investment companies and that ownership is proportional to the number of shares you purchase. So depending on how many shares you purchase, if you purchase 100 out of 1,000, you own 10%. So the value of each share, just kind of know how to evaluate each share. It's called NAV or net asset value. So how do we compute net asset value? Every time you hear the word net, it means something is subtracted from the asset in the situation, net asset. Basically, taken assets minus liabilities, subtracting liabilities, express on a per share basis. So the formula would look something like this. The market value of the assets minus the liabilities for the investment companies divided by the shares outstanding. The best way to illustrate this is to work an example. Suppose a mutual fund that manages a portfolio of securities worth 120 million, that's the value of the securities. Suppose the fund owes 4 million to its investment advisors and owes a million for rent, wages, due, and miscellaneous expenses. So they have expenses and they have to pay those expenses out of the fund. And the fund has 5 million shares. Well, let's plug in the formula. We have 120 million of assets minus the liabilities, which will give us 115 million divided by 5 million shares. The net asset value is $23. Now, obviously, if the asset value goes up, if those investments goes up in value, the net asset value for each individual will go up as well. Obviously, if the liabilities go up, it will go down. If the number of shares goes down, this will go up. This will go up. So let's take a look at another example. Consider these data from the 2020 year-end annual report of Fidelity. Assume all values are in millions. What was the net asset value of the portfolio? So again, we have to look up its net assets divided by the number of shares. What is assets? Net assets is assets minus liabilities. So we're going to take the assets, subtract the liabilities to come up with net asset, and we're going to divide this by 65.45 million. And that's going to give us $102.99, almost $103. So that's the net asset value of this mutual fund. In the next session, we would look at the different types of investment companies because we have different types of them. Again, the mutual fund is the largest, but we have to take a look at them and we'd look at mutual funds separately. We have to take a look at the different type of investment companies. As always, I'm going to remind you to like this recording, share it, visit my website for additional resources if you're trying to supplement or complement your finance or accounting education. Good luck and study hard.