Investment trusts, unlike unit trusts, can borrow money to buy shares, which is known as gearing. This extra buying potential can produce gains in rising markets but also accentuate losses in falling markets. Investment trusts generally have more freedom to borrow than unit trusts that can be sold to the general public.
Unlike with a unit trust, if an investor wants to sell their shares in an investment trust they must find someone else to buy their shares. Usually this is done by selling on the stock-market. The investment trust manager is not obliged to buy back shares before the trust’s winding up date.
The price of shares in an investment trust can be lower or higher than the value of the assets attributable to each share – this is known as trading at a discount or at a premium.
Investment trusts are constituted as public limited companies and issue a fixed number of shares. Because of this, they are referred to as closed-ended funds.
The trust’s shares are traded on the stock exchange like any public company.
The price of an investment trust’s shares depends on the value of its underlying assets and the demand for its shares. Investment trusts are allowed to borrow money to buy shares (a practice known as gearing). Different investment trusts will do this at varying levels. It’s worth checking before you invest because the level of gearing can affect the return on your investment and how risky it is.
These run for a specified time, usually five to ten years, although you are not tied in.
This type of investment trust issues different types of shares. When they reach the end of their term, payouts are made in order of share type.
You can choose a share type to suit you. Typically the further along the order of payment the share is the greater the risk, but the higher the potential return.
Bear in mind the price of shares in an investment trust can go up or down so you could get back less than you invested. The level of risk and return will depend on the investment trust you choose. Find out what type of assets the trust will invest in, as some are riskier than others.
Look at the difference between the investment trust’s share price and the value of its assets as this gap may affect your return. If a discount widens, this can depress returns.
Find out if the investment trust borrows money to buy shares. If so, returns might be better but your loses greater. With a split capital investment trust, the risk and return will depend on the type of shares you buy.
Access to your money
You can sell your shares at any time, although investment trusts are most suitable for long-term investments (over five years).
Investment trusts are funds that are publicly listed as companies on the London Stock Exchange, and so are traded like shares. Investment trusts have a manager as well as a board of directors, who uphold the interests of the investors.
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