Investing for beginners: What is an Investment Trust?

Summary

Investment trusts are publicly listed companies that pool money from clients to invest in various assets. They are closed-ended, meaning they have a fixed number of shares traded on an exchange, offering managers more discretion over buying and selling. Share prices can fluctuate, trading at a premium or discount depending on market sentiment. Investment trusts can also borrow money to amplify returns (gearing), but this increases both potential gains and losses. Due to the volatility and risks, they are best suited for experienced investors who understand these factors.

Takeaways

• 😀 Investment trusts are publicly listed companies that pool money from clients to invest in underlying assets.
• 😀 Investment trusts are closed-ended, meaning they have a fixed number of shares that are traded on exchanges.
• 😀 Shares in investment trusts are traded during market hours through investing platforms, giving the manager discretion on asset buys and sells.
• 😀 Open-ended funds differ from investment trusts as they trade to accommodate investors' money flowing in and out.
• 😀 The value of an investment trust can change according to market sentiment, and it may trade at a premium or discount based on demand.
• 😀 Investment trusts can trade at a discount, potentially offering long-term opportunities for investors.
• 😀 Investment trusts can borrow money to invest, known as gearing, which amplifies potential gains and losses.
• 😀 Higher gearing increases the amplification of potential gains and losses in investment trusts.
• 😀 The potential volatility and the difference between share price and underlying asset value make investment trusts suitable for experienced investors.
• 😀 It's essential to read the relevant fund fact sheet to understand the risks associated with investment trusts.

Q & A

What is an investment trust?

An investment trust is a publicly listed company that pools money from clients and invests it in a variety of underlying assets.

How are investment trusts different from open-ended funds?

Investment trusts are closed-ended, meaning they have a fixed number of shares that are traded on an exchange. In contrast, open-ended funds trade to accommodate investor money flowing in and out.

What does it mean for an investment trust to be 'closed-ended'?

Being 'closed-ended' means the investment trust has a fixed number of shares, and those shares are traded on the market, with their value fluctuating based on market sentiment.

How is the value of an investment trust determined?

The value of an investment trust can change based on market sentiment. When demand is high, the trust may trade at a premium to the value of the underlying assets, and when demand is low, it may trade at a discount.

What does the term 'gearing' refer to in investment trusts?

Gearing refers to the ability of an investment trust to borrow money in order to invest more in underlying assets. This amplifies both potential gains and losses.

How does gearing affect an investment trust's performance?

Gearing amplifies the trust's performance—gains when markets are positive and losses when markets decline. Higher gearing results in larger amplification of both potential gains and losses.

Are investment trusts suitable for all types of investors?

Investment trusts are typically considered suitable for experienced investors who understand the risks, due to their potential volatility and the fluctuations in share prices compared to the net asset value.

What is the significance of the net asset value (NAV) in relation to investment trusts?

The net asset value (NAV) represents the value of the underlying assets in an investment trust. The price at which shares in the trust trade can differ from the NAV depending on market conditions, potentially offering opportunities for long-term investors.

Why is it important to read the relevant fund fact sheet before investing in an investment trust?

Reading the fund fact sheet is important because it provides essential information about the risks involved with the investment trust, ensuring that investors are aware of the potential rewards and drawbacks.

Where can investors find more information about Fidelity's investment products?

Investors can find more information about Fidelity's investment products on their website, fidelity.co.uk.