What is an Investment Trust?

A simple explanation of how investment trusts operate in the UK

Christopher J. Traulsen, CFA 20 September, 2012 | 4:52PM Alanna Petroff

A fund is an investment vehicle that allows a large number of people to pool their money together in order to invest in a range of different securities such as stocks and bonds. In the UK, individuals can invest in different kinds of funds. There are two main fund categories: open-end funds and closed-end funds. Investment trusts fall under the the closed-end fund category. 

Buying & Selling Investment Trusts

Open-end funds can theoretically offer a limitless number of shares for investors to buy. These funds also stand ready to purchase back those shares when investors want to cash out. Investment trusts, on the other hand, are “closed-ended”. This means that they issue a fixed number of shares at their launch (much like the IPO of a newly public company), and then do not subsequently buy shares back or issue new shares, except in rare circumstances.

Investment trust shares trade on stock exchanges just like the shares of any other public company. Like stocks, investment trusts trade at different market prices throughout the day. (This is unlike open-end funds, which are priced once each day.) Investors also generally pay brokerage commissions to buy and sell investment trust shares, just as they would for the shares of any publicly traded company.

Unless you buy in on the investment trust IPO, any shares you purchase in an investment trust will usually be bought over an exchange, at the prevailing market price. Thus, rather than purchasing shares from or selling them back to the fund company, you are trading with other investors at a market price. 

With traditional open-end funds, you can be assured that the price you pay or receive when you buy into a fund is directly linked to the fund’s net asset value (NAV). Closed-end funds operate differently.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Christopher J. Traulsen, CFA

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.

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