An Investment Trust also works in a similar way to Unit Trusts and OEICs, with the major difference being that Investment Trusts are companies listed on the London Stock Exchange whose sole purpose is to invest their shareholders funds in shares of other companies or securities.
An Investment Trust is a collective type of investment, as it pools together the funds of investors in order to make investments in a range of companies. Investment trusts are based upon a fixed amount of capital which is divided into shares. This makes them closed ended, unlike the open ended structure of unit trusts. Once the capital has been divided into shares, investors can then purchase the shares. Another major difference between investment trusts and unit trusts is that investment trusts can borrow money for their investments (known as ‘gearing up’) whereas unit trusts cannot.
It should also be noted that the price of investment trust shares may be at a discount or a premium to the underlying assets and this needs to be considered when assessing investment to a fund.
Investment trusts can also invest in unquoted or unlisted companies, which may not be trading on the stock exchange, either because they don’t wish to or because they do not meet the given criteria. This ability, combined with the ability to borrow money for investments, can make investment trusts more volatile.
THE VALUE OF INVESTMENTS AND THE INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
SOME FUNDS WILL CARRY GREATER RISKS IN RETURN FOR HIGHER POTENTIAL REWARDS. INVESTMENT IN SMALLER COMPANY FUNDS CAN INVOLVE GREATER RISK THAN IS CUSTOMARILY ASSOCIATED WITH FUNDS INVESTING IN LARGER, MORE ESTABLISHED COMPANIES. ABOVE AVERAGE PRICE MOVEMENTS CAN BE EXPECTED AND THE VALUE OF THESE FUNDS MAY CHANGE SUDDENLY.