03: Investment trusts and investment companies
Investment companies are closed-ended and generally invest in the securities of other companies, although some invest in other assets, e.g. commercial property. The number of shares in issue does not rise or fall as it does with OEICs and unit trusts. The share price of an investment company is determined by the demand for its shares in the stock market. So it is only indirectly determined by the value of the underlying investments.
- If the price of an investment company share is more than the value of the underlying investments that it represents, the share is said to be ‘at a premium’. If the price is less than the underlying investments, which is the more usual situation, the share is said to be ‘at a discount’. A discount is normally more common than a premium.
- Another characteristic that distinguishes them from OEICs and unit trusts is that investment companies can readily borrow to invest, whereas borrowing powers for unit trusts and OEICs are strictly limited. If the investment company’s assets grow in value faster than the cost of the borrowing, the investors will gain proportionately more. But if the assets fall in value, the loss will be proportionately greater. So in some respects, investment companies may be generally more risky investments than unit trusts and OEICs.
- Investment companies can be divided into different classes of shares with different rights – so-called split-level investment companies. Some classes of shares provide fixed returns and others largely income or capital returns.
