An investment trust is a form of collective investment found mainly in the UK, structured as a public limited company (PLC) that raises capital from investors at launch through an initial public offering (IPO). Once the capital is raised, the trust is closed to new money and shares of the trust are bought and sold on the stock market. This structure allows an investment trust to operate with a fixed number of shares, differentiating it from open-ended investment vehicles like mutual funds. Investment trusts use the pooled capital to invest in a diversified portfolio of assets, including stocks, bonds and property, aiming to generate profits for shareholders through asset appreciation and income.
The importance of investment trusts lies in their ability to provide investors with several key benefits, including professional management, diversification and the potential for income and capital growth. One distinctive feature of investment trusts is their ability to employ gearing, a mechanism that allows them to borrow money to invest, potentially enhancing returns in rising markets but also increasing risk. Another unique aspect is that investment trusts can trade at a premium or discount to the net asset value (NAV) of their underlying assets, offering opportunities for investors to buy shares for less than the underlying value or sell them for more.
Investment trusts offer a long-term investment option with the potential for higher returns, given their ability to use gearing and invest in a wide range of assets. However, the use of borrowing to finance investments can amplify losses as well as gains, making it important for investors to consider their risk tolerance. The ability to trade at a discount or premium also adds a layer of complexity, as it requires investors to assess not just the performance of the underlying assets but also market sentiment towards the trust.
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