Advanced Diploma of Financial Planning (ADFP) Practice Test

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Prepare for the Advanced Diploma of Financial Planning Exam with comprehensive quizzes on finance principles, investment strategies, and risk management. Improve your knowledge and excel in your financial planning career!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

Which type of investment company is typically fixed in capitalization and trades shares on exchanges?

Open-end mutual funds
Unit investment trusts
Closed-end investment companies
Exchange-traded funds

The correct answer is: Closed-end investment companies

The correct answer is closed-end investment companies. These companies issue a fixed number of shares during an initial public offering (IPO) and subsequently trade on an exchange, similar to stocks. The capitalization of closed-end funds does not change after the IPO; the number of shares remains constant unless the company decides to issue more shares in a separate offering. Investors buy and sell shares of closed-end funds on the stock market, and the price is determined by supply and demand, which can cause the shares to trade at a premium or discount to the net asset value (NAV) of the fund's underlying holdings. This is distinct from open-end mutual funds, which continuously issue and redeem shares at NAV, or unit investment trusts, which have fixed portfolios but are not traded on exchanges in the same way. Exchange-traded funds (ETFs) are also traded on exchanges and are similar to closed-end funds, but they typically allow for continuous buying and selling and often have a mechanism for creation and redemption of shares that keeps the share price close to the NAV.