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It may have cost the industry
many millions of pounds to increase awareness amongst
potential investors about the benefits of investment
trusts with the 'its' campaign, but are we any the wiser
as to how they work?
Investment trusts are suitable
for a wide range of investors. They cover the spectrum
of the risk portfolio - from growth with little risk
attached to more speculative investment. They can
provide income, growth or both. As with any equity-based
investment, they are for the long term and you should
not be looking to invest for less than five years.
How they work
Investment trusts are companies listed on the Stock
Exchange that make money by buying and selling shares
in other companies. Investors who buy shares in an
investment trust are buying into a company. Investment
trusts have a limited number of shares to issue, which
is why they are known as 'closed-ended'.
When you invest in an investment
trust, the share price that you buy at does not necessarily
reflect the underlying value of the assets in the
trust. This is because investment trusts often trade
at a discount or a premium.
'Trading
at a discount means that the price of the share as
quoted on the stock market is less than the net asset
value (NAV) per share.'
The price at which investors
are prepared to buy and sell determines the price
of the shares. So discounts will generally be high
on an investment trust that has been performing badly
and will be even higher when a whole sector is out
of favour with investors.
Gearing for success
Investment trust managers sometimes borrow from other
institutions in order to boost the performance of
the fund, paying them back at a fixed rate of interest
- a practice known as gearing. If used successfully,
it can produce high returns. However, if the money
borrowed doesn't enhance the performance, the investors
lose out as money from the trust will be used to pay
off the loan.
Does it warrant it?
Warrants are another complication of investment trusts,
enabling investors to buy shares at a fixed price
at a future date. The aim of warrants is to protect
against a downward movement in the share value, so
it is essential that they are bought only if the investor
believes the value of the underlying shares will rise.
If you have an existing
investment trust portfolio that needs an overhaul
or if you would like to find out more about the benefits
of investing through an investment trust, please
e-mail or contact us for further information.
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