Glossary
AIC
The Association of Investment Companies (AIC) is the non-profit making trade body of the investment trust industry.
Buy backs
Many trusts have the option of buying back their own shares to cancel them when the directors think this is advantageous, e.g. when the share price is at a discount to the net asset value (NAV). While buy backs reduce the trust's total NAV, the advantage is that they increase the NAV per share. Share buy backs, however, may have the effect of increasing the level of potential gearing if the total NAV is reduced but borrowings remain the same.
Closed-ended
Investment trusts are said to be 'closed-ended'. This means that normally they have a fixed number of shares in issue. Changes in demand for shares in an investment trust are reflected by movements in the market price and not by an increase or decrease in the number of shares in issue. The opposite of closed-ended is open-ended.
Dealing spread
The dealing spread ('spread' or 'bid-offer spread') is the difference between the price at which shares in an investment trust can be bought (offer) and the price at which shares can be sold (bid). The size of the dealing price spread will vary from trust to trust. See Market price.
Derivatives
Investment trusts can make use of derivatives. Derivatives are a specific type of investments whose price is determined from the performance of another asset or index. Derivatives are most often used to offset possible adverse currency and market movements. As a result, there is a risk that potential gains may be restricted in a rising market. If derivatives are used for speculative purposes, there will be a high risk of loss because of the highly volatile nature of these financial instruments.
Discount
If the share price of an investment trust is lower than the NAV per share, the trust is said to be trading at a discount. The discount is shown as a percentage of the NAV. The opposite of a discount is a premium. It is more common for an investment trust to trade at a discount than at a premium. Please see Premium.
Dividend
The dividend is the income from a share investment, normally paid from the profit made by a company. Some investment trusts pay dividends on a quarterly or monthly basis. The majority pay dividends twice yearly.
Gearing
Investment trusts can borrow to buy investments if the manager expects stock markets to rise. This is known as 'gearing' and the idea is to make a greater return on the money borrowed than the cost of the borrowing. If markets rise, gearing can improve the trust's profits but, if they fall, losses will be greater.
Investment trust company
A closed-ended fund, listed on the London Stock Exchange, which invests primarily in a diversified portfolio of the shares and securities of other companies.
ISA
An Individual Savings Account (ISA) can comprise two separate component parts (cash, and stocks and shares). Investment in ISAs is tax-efficient as it is sheltered from Capital Gains Tax and higher-rate tax on dividends.
Management charge
The charge levied by an external investment manager for the management of an investment trust. It is usually charged quarterly and may consist of a fixed fee, a percentage fee based on assets and/or a performance-related fee.
Market capitalisation
The market capitalisation of a company is its stock market value, calculated by multiplying the number of shares in issue by the market price of the shares.
Market makers
Market makers create a market in a specific stock by quoting prices at which they will buy or sell on demand. They trade in the market as principals.
Market price
There are two prices quoted by market makers. The higher or 'offer' price at which they will sell shares (i.e. the investor's purchase price) and the lower or 'bid' price at which they will buy shares (i.e. the investor's selling price). The difference between the two is known as the 'dealing spread' or 'bid-offer spread'. Please see Dealing spread.
Mid-market price
The mid-market price is used to calculate the discount, yield and share price performance data that appears on the AIC's website.
Net asset value (NAV)
Investment trusts invest in shares, but sometimes they can hold other assets like properties and bonds. The asset value is the total market value of all of a trust's investments and assets minus any costs or borrowings.
NAV per share
Net asset value divided by the number of shares that have been issued in the trust in issue.
Open-ended fund
A pooled fund for which the number of units or shares in issue increases or decreases, usually daily, in response to demand from buyers and sellers. Unit trusts and open-ended investment companies (OEICs) are 'open-ended funds', the opposite of a closed-ended fund.
Open-ended investment company (OEIC)
An 'open-ended fund' in the form of a company which issues shares rather than units.
Ordinary shares
The main type of equity capital issued by companies and by conventional investment trusts. Investors are therefore entitled to their share of both income, in the form of dividends paid by the company, and any capital growth.
Premium
If the share price of an investment trust is higher than the NAV per share, the trust is said to be trading at a 'premium'. The premium is shown as a percentage of the NAV. The opposite of a premium is a discount. Please see Discount.
Stamp duty
A tax payable on the purchase of shares, property and businesses. All share purchases incur 0.5% stamp duty. All other assets are charged at different rates, depending on their value.
Total Expense Ratio (TER)
The total cost of operating an investment trust as a percentage of its average net assets is the Total Expense Ratio (TER). The TER is calculated by dividing the total operating costs by the average net assets and expressing the results as a percentage.
Total assets
For an investment trust, this figure would give an indication of the total value of all the company's investments before deducting any borrowings used
for gearing/investment purposes.
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