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There are certain features of the way investment trusts operate, that distinguish them from unit trusts and OEICs. Here’s a brief summary:
Gearing
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The ability of the trust to borrow money to magnify the potential returns on its portfolio. |
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Relies on the fact that stockmarket returns have exceeded the cost of borrowing over the longer term. |
Discounts and Premiums
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Investment trusts have an ‘official price’, known as the ‘Net Asset Value’, which is reached by adding up the value of each of the underlying investments. |
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The actual trading price is determined by supply and demand. If the actual price exceeds the Net Asset Value, the trust is said to be trading ‘at a premium’. If it’s below, they’re ‘at a discount'. |
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Some investors look to take advantage of of the occasions when a trust is trading at a large discount to its Net Asset Value i.e. they are buying £1 of underlying assets for less than £1. |
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