Definition
An investment trust is a type of company that is publicly traded and specialized in investing in financial securities such as stocks, bonds, real estate, or other assets. It collects funds from individual investors, pools them together, and manages them on their behalf. Investors in the trust own shares representing a portion of the holdings of the trust.
Key Takeaways
- Investment Trusts are similar to funds in that they pool resources from multiple investors to invest in a diversified portfolio of assets.
- Unlike funds, Investment Trusts are public limited companies (PLCs), therefore they’re traded like shares on the stock exchange.
- Investment Trusts can retain up to 15% of their income in any financial year, which can be used to boost their dividends in challenging years. This allows for a more steady income.
Importance
Investment Trust is an essential finance term as it represents a collective investment vehicle that pools together the resources of multiple investors, providing them an opportunity to invest in a diversified, and often, a professionally managed portfolio.
This in turn lowers individual risk and provides a chance to invest in a wider range of assets.
It’s structured as a public limited company and is traded on stock exchanges like regular stocks, offering a high level of transparency.
Furthermore, it has a unique feature called ‘closed-end’ design, which prevents direct effect of investor’s buying or selling activity on the underlying portfolio.
All these distinctive features make Investment Trust an invaluable concept in the field of finance and investment.
Explanation
Investment trusts serve crucial roles in the world of finance, offering a means for investors to pool their resources together and participate in a diverse range of assets or financial instruments they might otherwise be unable to access independently. Whether an investor has a small sum to invest or a larger nest egg, an investment trust can provide a cost-effective entry into potentially profitable investments such as real estate, bonds, or equities. They essentially democratize access to these types of investment options that might typically be only available to high-net-worth individuals or institutions.
The primary purpose of an investment trust is to generate returns for the investors. This is achieved in two main ways: capital growth and income generation. Capital growth occurs when the assets within the trust increase in value over time, resulting in a profitable selling price.
Alternatively, income generation happens when the assets within the trust produce regular returns, such as dividends from equities or rent from real estate properties. It’s essential to note that as with any investments, the value can go down as well as up, and this brings about the associated risks. Nonetheless, with professional management of these trusts, they continue to be a popular investment vehicle enhancing portfolio diversification and spreading risks.
Examples of Investment Trust
Fidelity Special Values PLC: This is a real-world example of an investment trust company based in the UK. They operate by pooling together the funds of several small investors and using the amassed capital to invest in diverse portfolios, such as securities or real estate. The investors hold shares in the trust and benefit from the profit generated.
Scottish Mortgage Investment Trust: Established in the UK, this Investment trust invests in a diversified portfolio with an emphasis on delivering growth to shareholders over the long term. Many investments are in technology companies like Amazon and Tesla.
Alliance Trust PLC: One of the oldest Investment Trusts in the UK, established in
It provides investors with a diversified portfolio across different regions and sectors, intending to deliver a combination of income growth and capital appreciation.
FAQs about Investment Trust
1. What is an Investment Trust?
An investment trust is a company that raises funds from investors and then invests this collective money across a diversified range of assets. The group of investors essentially become shareholders in the company and their shares can rise and fall in value in response to the trust’s investment performance.
2. How does an Investment Trust work?
Investment trusts pool together the money from its shareholders and use it to buy a wide range of shares and assets. The trust’s assets are then managed by a professional investment manager. Investors buy and sell shares in the trust on the stock market, at a price determined by supply and demand.
3. What is the difference between Investment Trust and Mutual Fund?
A significant difference between the two types of investments is that investment trusts are closed-ended. This means there are a fixed number of shares in circulation, regardless of investor demand. Mutual funds, on the other hand, are open-ended, and the fund issues new shares as more people invest and buys them back when people divest.
4. Are Investment Trusts a good option for beginners?
Investment trusts can be a good option for beginners as they provide diversification and are managed by professional fund managers. They also have a long-term perspective, typically making them less volatile than single stocks. However, as with all investments, they do carry risk and it’s important to do your research or seek professional advice.
5. How to buy shares in an Investment Trust?
You can buy shares in an investment trust through a stockbroker or through an online trading platform. These shares are bought and sold on the stock market, which means you can buy them during market hours and their price can fluctify throughout the day.
Related Entrepreneurship Terms
- Asset Allocation
- Capital Growth
- Diversification
- Dividend Distribution
- Net Asset Value
Sources for More Information
- Investopedia – An educational website dedicated to providing comprehensive data and articles on various financial concepts and terms including Investment Trust.
- Money Crashers – This is a personal finance blog and news website with articles that break down complex financial topics like Investment Trusts into digestible pieces.
- Financial Times – A leading global financial daily that offers articles, news, and analysis about diverse financial topics including Investment Trusts.
- Morningstar – Recognized for their in-depth research and analysis, Morningstar provides valuable insights into various investment strategies and financial instruments like Investment Trusts.
