When it comes to investments, there are a variety of options available to choose from. One option is an investment trust, which is a type of company that invests money in other companies. Investment trusts are usually set up as closed-end funds, which means that they have a limited number of shares that are traded on the stock market.
But what exactly is an investment trust? In this article, we’ll take a closer look at what a collective investment trust is, its benefits and drawbacks, and how it compares to other types of investments.
What is an Investment Trust?
Investment trusts are a type of collective investment scheme, which means that they pool money from many investors and use it to buy a range of assets. Investment trusts are usually open-ended, which means that new shares can be created to meet demand from investors, but they can also be closed-ended, which means that the number of shares is fixed.
Investment trusts are run by a professional fund manager, who is responsible for making investment decisions and ensuring that the trust meets its objectives. Investment trusts can invest in a wide range of assets, including shares, bonds, property, and cash.
The value of an investment trust’s shares is based on the value of the assets it holds. When the value of the assets goes up, the value of the shares goes up, and when the value of the assets goes down, the value of the shares goes down.
Investment trusts are listed on the stock exchange, including the S&P 500 performance index, which means that they can be bought and sold like any other share. They can also be traded on the secondary market, which is a market for buying and selling shares that are not listed on the stock exchange.
Benefits of Investment Trusts
There are a number of benefits that make investment trusts an attractive investment option. One benefit of investment trusts is that they offer the potential for capital growth. This means that the value of the shares can go up over time, which can lead to a profit for the investor.
Another benefit of investment trusts is that they offer diversification. This means that the risk of investing in just one company or one type of asset is spread across a number of different companies and assets. This can help to reduce the overall risk of the investment. Investment trusts also tend to have lower charges than other types of collective investment schemes. This is because they are not required to pay VAT on their management fees.
Finally, investment trusts can offer certain tax advantages. For example, investors in the UK can benefit from the dividend tax credit, which allows them to receive a tax credit on the dividends that they receive from their investment trust shares.
Drawbacks of Investment Trusts
There are also some drawbacks to investing in investment trusts. One drawback is that the value of the shares can go down as well as up, which means that there is a risk of losing money.
Another drawback is that investment trusts can be illiquid, which means that it may be difficult to sell your shares if you need to cash in your investment. Finally, investment trusts can be complex products, which means that they may not be suitable for all investors. It is important to make sure that you understand how they work before investing.
How do Investment Trusts Compare to Other Investments?
Investment trusts compare favorably to other types of investments.
For example, investment trusts offer the potential for capital growth, which is something that many other types of investments do not offer. They also offer diversification and lower charges, which are both attractive features.
However, it is important to remember that investment trusts do have some drawbacks, such as the risk of loss and the lack of liquidity. Before investing, it is important to make sure that you understand these risks.
Overall, investment trusts are a good option for investors who are looking for potential capital growth and diversification. However, they are not suitable for everyone, and it is important to make sure that you understand the risks before investing.
How to Get Started With Investment Trusts
This article is for information only and does not constitute financial advice.
That said, there are a few things that you need to know before you start investing in investment trusts.
First, you need to choose an investment trust that meets your investment objectives. Make sure that you understand the trust’s investment strategy and that you are comfortable with the level of risk.
Next, you need to decide how much you want to invest. Remember that the value of shares can go down as well as up, so you could lose money if you invest too much.
Finally, you need to open an account with a stockbroker or investment platform. This is where you will buy and sell your investment trust shares.
Now that you know what an investment trust is and how to get started, you’re ready to start investing. Just remember to do your research and only invest in trusts that you understand. With a little bit of effort, you can soon start earning a profit from your investment trust shares.
Final Investment Tips
Here are a few final tips to help you get started with investment trusts:
- Do your research: make sure that you understand the trust’s investment strategy and that you are comfortable with the level of risk.
- Start small: remember that the value of shares can go down as well as up, so it’s important to only invest an amount that you can afford to lose.
- Use a stockbroker or investment platform: this is where you will buy and sell your investment trust shares.
- Understand the risks: remember that investment trusts can be complex products and that there is a risk of loss. Make sure that you understand the risks before investing.
With a little bit of effort, you can soon start earning a profit from your investment trust shares. Just remember to do your research and only invest in trusts that you understand.
