The role of Investment Trusts in the capital market
An Association of Investment Trust Companies (AITC) case study

Summary

Concepts:

Investment, investment trusts, funds, risk, shares, shareholders, businesses, fund managers, income, dividend, market, finance, growth, money.

Summary:

The capital market enables individuals and organisations with spare capital (money which they want to invest) to channel these funds to businesses and other organisations that need investment capital (money for expansion or other purposes).

This case study explains the operation of Investment Trusts, which are a key part of the market.

Businesses sometimes need funds above the income they get from trading to help them grow and also to carry out their day-to-day trading activities.

Business acquire funds from several sources: shareholder capital - where investors give the company money in exchange for shares (long-term) loan capital (medium-term) bank overdrafts and trade credit (short-term).

They channel funds from financial institutions and households to businesses through the Stock Market and these funds can help businesses grow and expand.

Investors aim to gain from holding Investment Trusts in two ways:

  • they often receive a dividend - their share of the profit earned by the Investment Trust in a given period eg 6 months or a year
  • the value of their investment may grow over time if the share prices of the companies in which they have invested go up, particularly if their Investment Trust has invested for growth.

As such, it has an independent board that protects shareholders' interests and appoints the investment management company.

Because the fund managers of major Investment Trusts have a good understanding of risk, many of them were able to anticipate the risk involved in investing too heavily in new technology companies.

Learning outcomes:

As a result of carefully reading this case study, students should be able to:

  • develop a basic understanding of the operation of capital markets and sources of finance, including capital
  • understand the role of an Investment Trust
  • understand the notion of risk and the concept of spreading the risk
  • understand why investors invest and the return they gain

Association of Investment Trust Companies (AITC) | The role of Investment Trusts in the capital market

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