Table of Contents:

Mutual Funds

A mutual fund is a company that creates a diversified pool investment portfolio and sells shares in this fund to investors. The four main categories of mutual funds are domestic and world equity funds, bond funds, money market funds, and hybrid funds—funds that invest in a combination of stocks and bonds. An equity fund invests in shares of U.S. and foreign corporations. Equity funds are the largest type of fund and account for about 45 percent of all mutual fund assets, as shown in Table 9.6.[1]

Table 9.6 U.S. Mutual Fund Assets, 2012

Categories of Mutual Funds Amount Invested ($ billions) Percentage of All U.S. Funds

Equity funds

5,934.3

45.5

Bond funds

3,426.4

26.3

Money market funds

2,693.5

20.6

Hybrid funds

991.0

7.6

Total U.S. mutual funds

13,045.2

100.0

Source: Investment Company Institute, “Table 3,” 2013 Investment Company Fact Book, 144.

The amount of risk and the potential for financial gain varies from fund to fund. Investors purchase stock in a mutual fund in much the same way as they purchase stock in a corporation. In other words, each investor, called a shareholder, is a part owner of the mutual fund. The main asset of a mutual fund is its diversified portfolio of securities. When the value of individual securities within the fund's portfolio rises, investors are typically awarded dividends. In addition, the value of the entire mutual fund can rise over time. This enables investors to earn capital gains. In many cases, the dividends and capital gains earned by shareholders are ploughed directly back into the fund.

Mutual funds have become a popular investment option for investors in recent decades. In 1980 the total U.S. assets of mutual funds were just $135 billion spread across 564 funds. By 2012 total U.S. mutual fund assets exceeded $13 trillion spread across 7,596 funds. These funds were often managed by financial firms called sponsors. The $13 trillion in U.S. mutual fund assets accounted for about half of all mutual fund assets worldwide ($26.8 trillion). Large institutional investors in mutual funds included pension funds, state and local governments, and businesses. In addition, 92.4 million individuals in the United States owned mutual funds. To put it another way, nearly half of all U.S. households owned shares of at least one mutual fund. Globally in 2012 there were 73,243 mutual funds in the world, including 21,103 in the Americas; 34,470 in Europe; 16,703 in Asia and the Pacific; and 967 in Africa.[2]

Futures Markets

A futures market, or futures exchange, is a mechanism by which contracts for items are bought and sold. Thus, the operation of a futures market is similar to the operation of a stock market or bond market. In a futures market, however, investors buy and sell futures contracts, which are formal agreements to take a delivery of an item (buy the item) or make a delivery of an item (sell the item) at a specific date in the future. Also listed on the contract is the agreed upon price for the item, the quantity, and the location for the delivery. Items traded in futures markets generally fall into one of two categories: commodities or financial instruments. Popular commodities include agricultural products such as corn or wheat, energy sources such as crude oil or natural gas, and precious metals such as gold or silver. Two important financial instruments traded in futures markets are government securities such as Treasury notes or bonds, and world currencies.[3]

As early as the 1860s futures contracts were used at the Chicago Board of Trade (CBOT) for agricultural products. Under the contract investors agreed to buy quantities of grain from producers for a set price and to take delivery later in the year. This system provided some price stability in agricultural markets, as market participants knew in advance the terms of the transaction. A locked-in price enabled the grain producer to calculate with precision the firm's revenues and enabled the buyer to anticipate the costs of grain in the production of bread or other finished good. Over time this system also sparked a lively trade in futures contracts. For example, if investors were confident that grain would fetch a higher price than was stated in the futures contract, the contract became more valuable—and a good investment for a speculator who wanted to buy the contract for a low price today and sell it for a higher price in the future.

Today's futures markets operate under many of the same basic principles that guided futures markets more than a century ago. Naturally, technological advances and the types of items traded have brought the process into the twenty-first century. On the floor of futures exchanges, contracts are negotiated through sophisticated electronic communications, which are often used in conjunction with the time-honored shouting and hand signaling of traders in the “pit.” Floor-based and electronic trading is fast paced and efficient, which adds to the liquidity of futures contracts. This trading is also highly speculative, which contributes to the volatility of contract prices.

Recent consolidations in the futures industry have brought several major futures exchanges under one roof. The merger of two venerable exchanges, the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT) in 2007 created the CME Group, Inc. A year later the CME Group acquired the New York Mercantile Exchange (NYMEX) and its affiliated Commodities Exchange (COMEX). Today the CME Group is the world's largest futures exchange, with offices in several major U.S. cities and in other financial hubs such as London, Tokyo, Calgary, Hong Kong, Singapore, Sao Paulo, Belfast, and Seoul. The opening of the CME Group's Global Command Center in 2010 illustrates the industry's commitment to global connectivity in futures trading.[4]

  • [1] Investment Company Institute (ICI), “Table 3: Total Net Assets of the Mutual Fund Industry,” 2013 Investment Company Fact Book, 53rd ed. (Washington, DC: ICI, 2013), 144
  • [2] Investment Company Institute (ICI), “2012 Facts at a Glance,” “Table 60: Worldwide Net Assets of Mutual Funds,” “Table 61: Worldwide Number of Mutual Funds,” 2013 Investment Company Fact Book, 53rd ed. (Washington, DC: ICI, 2013), 2, 201-202.
  • [3] NYSE Euronext, “Futures,”
  • [4] CME Group, “Spirit of Innovation: Timeline of Achievements,”; CME Group, “Global Offices,”
 
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