An investment trust is a company that holds shares in other companies. Investments trusts are quoted on the stock exchange and though many people hold shares in them, they remain relatively unknown. Since its main business is holding shares in other companies, if those companies do well, the trust does well. The reverse is also true. Such trusts reduce risk; one company whose stock it holds may fail, but it's unlikely that all its companies will fail.
Difference of Investment Trusts
Investment trusts do the same thing as unit trusts and open ended investment companies, but with a significant difference: investment trusts are stock market-quoted companies. They issue a fixed number of shares, publish audited financial statements and an annual report, and they hold an annual general meeting.
The price of a share in an investment trust doesn't just depend on the value of the shares the trust holds; it also depends on the demand for shares in the trust itself. If you add together the entire value of their shares, investment trusts are generally worth less than the value of the shares the trust owns, usually about a 15% discount. If demand for a trust's shares rises – meaning more people want to buy shares in the trust – then the discount gets smaller. The reverse is also true.
Investment Trusts vs. Unit Trusts
Investment trusts are riskier than unit trusts. They also have more of an upside. Since investment trusts don't pay commission, they're cheaper to buy than are unit trusts. Investors don't lose 5% or 6% to commission costs, making it a good deal for individual investors. Fees are often as little as 0.5% or even a flat fee of £10. Investment trust management companies allow people to invest a fixed amount every month through monthly plans, usually £20-£50.
Because they don't pay commission, cynics theorise that financial advisers may be reluctant to recommend investment trusts, preferring the commission-paying unit trusts. It is certainly the case that they are less popular than other investment options.
Types of Investment Trusts
There are a variety of investment trusts, similar to unit trusts. The most useful are the international general trusts – Foreign & Colonial, Scottish Mortgage, and Alliance Trust are examples. These are very large trusts that invest across the world's major markets, meaning one doesn't have to build a portfolio for specific objectives as one needs to do with unit trusts. It makes them ideal investments for both novices and experienced investors.
Investment trusts are hardly exciting, but they are solid, the kind of investment one can buy and forget about for 10 years.