Financial Definitions: UITs

Financial Definitions: UITs

As we move forward in our financial definitions series, we are presented with Unit Investment Trusts, also known as UITs. This type of investment is similar to the mutual fund and the closed-end fund because all three are types of investment companies. Whoa, you say? What is an investment company? Well, let’s take a look at both investment companies and UITs.

Investment Companies

Any corporation, business trust, partnership or LLC can create an investment company…if they are in business to issue securities or to invest in securities. These companies are subject to investment regulations, which help to ensure their business is legit.

Beyond the basics, investment companies are broken into three types: the mutual fund, closed-end fund and the UIT. As you may remember, mutual funds are basically a collection of people pooling their money together to buy a group of stocks. Closed-end funds are similar, with a catch; you can often only jump on the wagon for the initial offering.

UIT Basics

Now that we know what investment companies are, let’s jump right into the UIT specifics. Basically, a UIT is a company that sells units of securities that are bought for the life to a collective group of investors, often through a limited public offering for a determinate period of time. Now, that is quite the long statement, so let’s break it down a little.

Beyond the Basics

Okay, so we established that a UIT is a company that sells units of units of securities. This is similar to how the mutual fund works. Also just like mutual funds, the UIT units are often redeemable later on, meaning that you can buy those units and sell them back at any time.

This is where the similarities to the mutual fund end and the similarities to the closed-end fund begin. Like a closed-end fund, the UIT will often offer limited public offerings, but unlike the closed-end fund, if you wish to sell some units, the sponsors often buy back those unwanted units and re-sell them to other investors.

UITs also often expire, although not like that yogurt or milk left in the fridge too long. Actually, they pick a termination date when they are established. Sometimes this termination date is 50 years down the road, but UITs based on bonds could be much sooner. Whatever the case, when the UIT reaches that date, the securities are sold, and the cash is given to the investors.

The Unit Investment Trusts also tend to buy stocks or securities and hold onto them for life. This can be great for investors who wish to follow the stocks in which they are invested: the UIT securities that are advertised at purchase will often be the exact same securities that the UIT ends with upon termination.

Overall, UITs can be a great part of your portfolio. They can offer you the relative security of a mutual fund with the special offer, the LPO, of a closed-end fund. Also, the ability to follow the stocks in your UIT with general ease can be a perk to the UIT. One caution: as with any investment, be sure to research the UIT company and the stocks offered in the basked before purchase.

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MoneyCone's picture

MoneyCone wrote:

Mon, 08/29/2011 - 19:11 Comment #: 1

Excellent explanation Christa!

Christa Palm's picture

Christa Palm wrote:

Wed, 08/31/2011 - 14:25 Comment #: 2

Thanks MoneyCone!

Financial Definitions - Glossary for Understanding Finances 's picture

Financial Definitions - Glossary for Understanding Finances wrote:

Thu, 01/19/2012 - 21:47 Comment #: 3

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