Unlike OEICs, investment trusts are closed-ended funds. They operate in the same way a company does: they raise money by issuing shares to shareholders, and then they invest the money they have raised. Whilst a company would then invest the money it had raised in physical assets or saleable goods, an investment trust will invest its money in the shares of other companies.
How investment trusts work
One way to buy an investment trust is via a stockbroker. Or sometimes you can buy shares from the fund management company that manages the trust. Buying from the fund management company may mean you can spread your investment out and buy in over a period of time, even via an ISA.
Charges associated with investment trusts
You can expect to pay a commission when you buy and sell shares in an investment trust, but you can minimise the cost of this by using a discount broker. You are also guaranteed a small loss in the difference between the bid and offer prices of shares. And unlike a lot of other investment options, investment trust purchases incur stamp duty (.5% on purchases). Finally, there are annual management fees and some further administrative costs.
All of the costs associated with investment trusts don’t necessarily mean that they make for overly expensive investment vehicles. Unlike unit trusts, investment trusts are not allowed to advertise, so this means their running costs are somewhat lower. And as investment trusts are, in effect, companies, their management charges are controlled by directors with an aim to running the company in a way that is conducive to the best interests of the shareholders. The end result is that investment trusts can make for a low-cost investment option, with the largest investment trusts having very low costs indeed.
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