Page 2: What about investment trusts?
Investing in shares of an individual company involves more risk than in the shares of a variety of companies. This is where collective investment vehicles such as investment trusts, unit trusts and open-ended investment companies (OEICs) come in. These invest in the shares of other companies on behalf of investors. They pool investors' money and have a professional fund manager to invest in a wider range of companies than most people could practically do themselves. This way, people with small amounts of money can gain exposure to the long-term potential of the stockmarket, at low cost, through a diversified and professionally run portfolio of shares. This spreads the risk of stockmarket investment. Investors can invest from £25 per month or a £250 lump sum.
Investment trusts, unit trusts and OEICs do have their differences. Investment trusts are closed-ended, public limited companies quoted on the stock exchange. They are companies that invest in other companies on behalf of investors.
Most plcs produce either goods or services for sale to customers. Investment trusts are plcs but unlike most other plcs their sole aim is to make money for shareholders by investing in shares of other companies. Investment trusts are closed-ended funds: at launch, they issue a fixed number of shares to raise the initial pool of investment capital. The value of which will increase or decrease according to how well it is invested by their managers. Unit trusts and OEICs on the other hand are open-ended. This means that, unlike investment trusts, they expand or contract in size as people buy or sell their investment. Unit trusts are not companies and OEICs, although they are companies, are not listed on the stock exchange. This structure is one of the main differences between investment trusts, unit trusts and OEICs, but each have their own advantages and disadvantages as a result of their structures.
Some investment trusts and other financial institutions buy shares in under-performing companies to try to improve their performance and the ultimate return on their investment. Investment trusts will monitor the performance of those companies and as shareholders may influence the decisions made there.