Investment Companies Education
- How Investment companies Work
- How Investment companies are structured
- How Investment companies differ from unit trusts
- Ways to use Investment companies
- Risk and reward
- How to choose an Investment trust
- Savings plans and ISAs
- Different types of share
- Discounts and premiums
- Fees and charges
- Understanding gearing
- How to buy an Investment Trust
- How Investment companies Work
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Investment companies are often dubbed "the city's best kept secret". They have many advantages over unit trusts and yet are much less well known.
- How Investment companies are structured
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Investment companies are companies which exist purely to make money. Their only business is to buy and sell shares in other companies.
When you invest in an Investment trust company, you become a shareholder of that company. A team of experts will look after your money. If the company they chooses do well, the value of the investment portfolio will grow and so should the value of your shares in the Investment trust.
The beauty of Investment companies is that they enable you to spread risk by pooling your money with that of other investors and using it to buy shares in hundreds of other companies. This means that you don't have the hassle of having to buy, monitor and sell them all individually.
You also avoid the worry of capital gains tax. This will only become an issue when you sell your Investment trust shares, if you have made a gain above the capital gains tax threshold.
Investment companies can invest in companies list in UK and foreign stock markets. You can buy shares in as many different companies as you like.
Levels and bases of, and reliefs from, taxation are subject to change. Because these investments may go down in value as well as up, you may not get back the full amount invested.
- How Investment companies differ from unit trusts
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Investment companies are different from unit trusts. As companies, Investment companies are listed on the London Stock Exchange, meaning they have an independant Board of Directors who are directly answerable to shareholders for the trust's actions and performance.
Investment companies are closed-ended funds. This means the amount of money which the trust raises to invest is fixed at the start, because a set number of shares are issued. Having a fixed pool of assets enables the fund manager to plan ahead with confidence and make the best investment decisions possible.
By contrast, a unit trust is an open-end fund that grows or shrinks as people join and leave. This can't happen with Investment companies because shareholders don't sell their shares back to the trust, they sell them to another buyer. Every selling shareholder must be first matched with a buyer, via the stock market, before a transaction can take place. This means that the manager's fund is unaffected by shareholders who want to sell their shares.
- Ways to use Investment companies
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Investment companies are an effective and versatile way to grow your money. They can help you grow your money at all stages of your life and for all kinds of uses - to pay off a mortgage, boost pension income, or help your children.
- Risk and reward
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Because Investment companies are a stock market investment, they of course carry a certain amount of risk. They are intended to be a long term investment, for people who are prepared to tie up their money for five years or more.
There are a few different sectors of trust to help you choose a level of risk you feel comfortable with. Generally speaking, the higher the risk you take, the greater the volatility and the higher the potential rewards (or losses). Emerging markets companies are high risk, while companies that invest in blue chip UK companies are lower risk.
Past experience has shown that volatility in the stock market is smoothed out over time and that Investment companies can be an excellent way to grow your money. On average they have by far outstripped building society returns, and have compensated against the eroding effect of inflation over time.
Because these investments may go down in value as well as up, you may not get back the full amount invested.
- How to choose an Investment trust
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When choosing an Investment trust you will need to consider both your long and short term aims. As a general rule, younger people tend to invest for capital growth, while older people usually invest to boost their income. You can also opt to invest for income with some capital growth.
Investment companies are intended as long term investments.
- Savings plans and ISAs
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You don't have to be worth a fortune to afford an Investment trust. Many can be set up with a minimum lump sum of just £250, while savings plans are available for a little as £25 a month. The exact terms and conditions will vary from trust to trust.
You may want to consider whether it's best to go for the lump sum or monthly savings plan option. If you drip-feed your money into a trust each month, you will avoid the risk of buying the shares all in one go when the price may be high. Monthly investments even out any fluctuations in the cost of the shares, an effect known as pound cost averaging. On the other hand, if you invest a lump sum, more of your money could take advantage of short term rises in the market.
Investment companies can be held in an ISA. ISAs were introduced in 1999 to replace PEPs. They are not a product in their own right but a tax free wrapper which means that any capital gains from your investment will not be subject to tax. Often you can hold a number of different companies within one ISA wrapper.
levels and bases of, and reliefs from taxation are subject to change.
- Different types of share
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A certain type of Investment trust, known as split capital Investment companies, can issue different kinds of share within a single fund to suit the differing needs of their investors. This is something that unit trusts cannot do.
The share types are capital shares and ZDP shares, which aim to provide capital growth, income and residual capital share that can offer income plus the opportunity for capital growth, and income shares.
- Discounts and premiums
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The value of the shares you own in an Investment trust is affected by both the value of the shares owned by the trust in other companies and by the level of demand for shares in the Investment trust. Shares in a well managed trust are likely to be subject to higher demand which will increase the share price.
If the value of the assets falls below the total value of all the trust's shares, the trust is said to be trading at a discount. If the value of the assets rises above the total value of all the trust's shares, the trust is said to be trading at a premium.
If you buy when shares are at a discount, the discount could narrow, increasing your returns, or grow, eroding your returns. If you buy at a premium, it could narrow, reducing your returns or grow, increasing your returns. So you could consider discounts and premiums when considering what level of risk you feel comfortable with.
- Fees and charges
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Investment companies are usually cheaper to buy than unit trusts. There are two charges when you deal direct with an Investment trust: an initial charge (or entry charge) and ongoing annual charges which can be as low as 0.5% - lower than the average unit trust.
If you buy a trust's shares direct on the stock market you don't have to pay the initial charge, though you will incur dealing charges and stamp duty.
If you want to invest through an ISA, you may have to pay a little more, but this will still usually work out cheaper than most unit trust ISAs.
Each trust will provide details on its own fees and charges. These are available by applying direct to the trust.
- Understanding gearing
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Because Investment companies are companies, they can choose to gear up (borrow money) to buy more assets when interest rates are low or when a stock presents a good buying opportunity. This can greatly increase the return to shareholders.
Conversely, if the investments fall in value when the trust has borrowed, the negative effect is magnified. However, over the long term, the growth in the value of shares generally has out paced the cost of borrowing.
