Investment Trusts, traded on the London Stock Exchange

Investment trusts are traded on the London stock exchange. As a consequence, they are either purchased at launch through the fund manager, or via a stockbroker.

Investment trusts are companies that invest in shares and the price at any time is determined by the supply and demand for those shares on the stock exchange.

Investment trust shares may therefore trade at greater than the underlying value of the investments held, or less. If the former, the shares are regarded as trading at a premium, if the latter, the shares are regarded as trading at a discount.

Investment trusts are allowed to borrow if they wish to for the purpose of buying shares and this can increase the prospect of positive returns, or, increase the risk of losses, if investment markets go in the wrong direction.

How do Investment Trusts compare to Unit Trusts?
Investment Trusts spread the risk of stock market investing over a number of shares just like unit trusts. But investment trusts are inherently more volatile than unit trusts, because they are companies in their own right with shares issued and listed on the stock exchange.

Unlike unit trusts, where unit prices reflect the value of the shares held within the fund, the share price of an investment trust is driven by supply and demand.

This is because investment trusts are "closed-end", meaning there are a finite number of shares, while unit trusts are open-ended.

This can have a very different impact on the way your investment is valued and performs.

If an investment trust falls out of favour with investors, its share price can get driven down to the point where it is lower than the underlying value of the investments it holds, known as the "net asset value" (NAV).

Likewise, an investment trust that becomes flavour of the month can trade at a premium to its NAV.

It is the share price rather than the NAV which will dictate how your investment performs.

Another factor to consider is that investment trusts can borrow money to invest, also known as "gearing-up".

This can increase the risk and the rewards. If the fund manager gets it right, it makes a bigger than usual gain, pays back the debt and keeps the extra. If it gets it wrong it makes a bigger than usual loss and has to find the money to repay the loan from elsewhere in the fund.

These extra risks mean investment trusts are not for the faint hearted, and should be held for the long-term. Investment trusts cover most of the same sectors as unit trusts, including shares from around the world and property.