If you are new to the world of financial services and investments, you'll encounter a myriad of technical terms and abbreviations that constitute what might be perceived as an esoteric financial lexicon. One of the first terms you will come across is that of an Investment Trust, but what exactly is an Investment Trust and how does it work?
In short, an investment trust is typically a closed-ended collective investment vehicle which is traded on the stock markets as a public limited company, but that doesn't really explain much, so more on that later. They are primarily operated in the UK and so the examples outlined here will be assumed to be UK based.
Investment Trusts are essentially companies (not technically trusts) which have been set up to invest in the shares of other companies. Their value therefore represents the assets in which they are invested rather than the company's own property, personnel or ideas. They are designed to give individual investors the opportunity to invest in wider range of companies, and at a lower cost, than they would be able to achieve on their own.
They are termed collective investments because they achieve this aim by providing a vehicle by which they can allow many investors to pool their money and collaborate together to invest in a large range of underlying assets. As institutional investors they have access to investments which may not be within the reach of the individual investor and they are logistically able to invest in a greater variety of assets. The scale on which they trade also means that they benefit from economies of scale as well as bulk discounts on costs and charges. Therefore, the relative cost that is passed down to each investor in the trust is lower than if they were to trade on their own. For more information, contact a finance consultant or investment professional.