Education and resources

What’s the difference between an investment company and other types of investment funds like unit trusts and OEICs?

The biggest difference is that as a company listed on the stock market, an investment company is ‘closed-ended’ and has a fixed number of shares in issue. Unit trusts and OEICs are ‘open-ended’ – they can create and cancel units/shares as investors want to join or leave the fund.

Because investment companies don’t have to worry about creating or liquidating investor’s shares at short notice, they can take a really long-term view of their investments and more readily invest in less liquid investments such as property, infrastructure and unlisted companies.

But a fixed number of shares also means the share price is driven by investor demand and so can be higher (at a ‘premium’) or lower (at a ‘discount’) than the value of its investment portfolio. The unit/share price of an OEIC or unit trust will directly track the value of its underlying investments.

Because investment companies are public limited companies, they offer their investors – or shareholders – other benefits that unit trusts and OEICs don’t. These include an independent board to oversee shareholder interests and an annual general meeting where shareholders can vote on issues affecting the company.

What regulation protects me when I put money in an investment company?

Investment companies listed on the London Stock Exchange are subject to the rules of the UK Listing Authority. These address executive pay, corporate governance (how an investment company is controlled) and disclosure of information about the company.

If investment company shares are held in a packaged product such as a share plan, ISA or pension, the product provider must be regulated by the Financial Conduct Authority, which means it must operate to certain standards and investors have access to a compensation scheme if they lose money through company failure, and to an ombudsman scheme to settle complaints.

Why do investment company shares have a different buy and sell price?

At any one time an investment company share will have a bid price (to buy it) and an offer price (to sell it back). The bid price is higher than the sell price. The difference between the two is the share-dealing service’s profit and helps finance its service. When a lot of shares are exchanging hands, the difference between the bid and offer price can be very small. If trading activity is low, the bid-offer spread can tend to widen.

What’s the easiest way to buy shares in an investment company?

Like any publicly listed company, shares can be purchased through an online investment platform or stockbroker. Investment companies such as abrdn offer their own share plans where you can invest a one-off sum or regular monthly amounts.

What’s an investment company ‘discount’ or ‘premium’?

These refer to the difference between the value of an investment company’s shares and its net asset value (the value of its underlying portfolio). If a company’s shares are trading at a higher value than its net asset value per share, it is said to be at a premium. If the share price is lower than the net asset value, it is trading at a discount. Investment companies tend to trade at a premium when their shares are in strong demand and at a discount when demand declines. Typically, most investment companies trade at a small discount to their net asset value.

Is a discount a good or bad thing?

Experienced and professional investors often look to buy investment company shares at a discount to their net asset value in the anticipation that the discount will reduce. But concerns can arise over investment company shares that persistently trade at a big discount as investors are unable to realise the true value of the underlying investments.

In this case, the investment company may take measures to narrow the discount. These may include buying back shares in order to increase the value of those that remain in the market.

Will investing though an investment platform affect my shareholder rights?

When you buy shares through an online investment platform, the platform may typically buy shares for you digitally through a ‘nominee account’. This nominee account becomes the registered owner of the shares. So it’s important to check whether a platform will pass on shareholder rights such as receiving the annual report and being able to attend and vote at annual general meetings.

What’s an offshore investment company?

An offshore investment company is one that’s registered in an offshore UK centre such as Jersey or Guernsey although it may still be listed on the London Stock Exchange. Many offshore investment companies were set up in the past as a more tax-efficient way to invest in assets such as property and bonds. At the time, income on such assets was subject to tax if a company was registered in the UK but not if it was registered offshore.

However, recent changes to the tax rules have made it easier for companies investing in these assets to be based in the UK.

But there are still differences between onshore and offshore investment companies. Firstly, 0.5% stamp duty is payable on shares purchased in an onshore investment company but not in an offshore company’s shares. Secondly, an onshore investment company cannot invest more than 15% of its gross assets (at the time of investment) in any one single holding. No such limit applies to Channel Islands-registered companies and there are also different rules on what can be distributed from an offshore investment company.

What is ‘gearing’?

Gearing refers to the practice of borrowing money to buy further investments with the aim of increasing or ‘gearing up’ investors’ potential returns. To put very simply, if an investment company has assets of £100 million then borrows a further £10 million to invest, it could potentially boost returns for investors by a further 10% (minus the cost of borrowing the extra money). This investment company would be said to have gearing of 110. If it borrowed £50 million, its gearing would be 150.

Gearing can potentially increase returns when an investment company’s investments are rising in value. But it can also increase losses if a company’s investments drop in value or the cost of borrowing rises sharply, so gearing needs to be managed carefully. As an investor it is important to check how much gearing an investment company has – the higher the gearing, the higher the company’s risk profile.

How can I compare the risk profile of investment companies?

Because their share price can move up and down, all investment companies carry a certain level of risk. As an investor, you must be prepared to accept that you could receive back less than you originally invested if an investment company’s shares fall in value. Broadly speaking, some investment companies are likely to see greater fluctuations in value than others: an investment company that invests in young, volatile emerging markets may see greater fluctuation in its share price than one investing in big companies listed in Europe and the US, for example. But there are no guarantees – and experience has shown that even highly developed and regulated stock markets can see big swings in value.

The summary risk indicator provided in an investment company’s ‘Key Information Document’ gives you a guide to the company’s level of risk compared to other products. To help ensure that an investment matches your own risk tolerance, you may wish to speak to a financial adviser who can conduct a full risk profile for you.

As a shareholder, can I vote at AGMs?

Technically, yes if you are the registered holder of the shares. If you invest through an online investment service, check if your shareholder rights will be passed onto you as your shares may be held through a nominee account to improve efficiency.

Can I pass on my investment company shares when I die?

Yes – like all company shares, they can be passed onto chosen beneficiaries when you die. You need to specify in your Will who is to receive the investment. On death, the people you have chosen to act as executors of your estate will need to complete and sign a stock transfer form, available from the company’s registrars. The details of the company registrar can be found on documentation such as an investment company’s annual report and on its website. Inheritance tax may be payable on shares if they are gifted within seven years of tax and the total value of your estate exceeds the current inheritance tax threshold.

Alternative investments

Investments beyond mainstream asset classes such as equities, bonds and cash. Can refer to property, venture capital, commodities, and hedge funds among other investments.

Annual General Meeting (AGM)

The annual meeting at which shareholders in a public company can hear about its progress and future direction and vote on issues.

Asset class

A group of investments with shared characteristics. Equities, bonds, property and cash are considered the four main asset classes.

Bare trust

A legal structure that allows investments to be held on behalf of a beneficiary – e.g. a child – until they are ready to take ownership. The beneficiary has all legal right to the capital and assets in the trust.

Bid price

The price at which shares in an investment company can be bought. See also ‘offer price’.

Bid-offer spread

The difference at any given time between the bid price at which you can buy shares in an investment company and the offer price at which you can sell them. Typically the bid price will always be marginally higher than the offer price.

Board of directors

The group of individuals elected to represent shareholders, to ensure that an investment company is being run in the shareholders’ best interests, and to determine the company’s future direction.

Bond

A security issued by a government, company or organisation to raise capital. A bond pays investors a regular (and usually fixed) income and will typically return investors their capital at the end of a fixed term. Because of these features, bonds are generally considered to be lower risk than shares. See also ‘fixed income’.

Buyback

A programme by an investment company to buy back its shares from investors in order to raise the value of those that remain in the market. Commonly used to tackle shares that are trading at a deep discount to their underlying net asset value.

Capital gains tax

The tax payable by individuals on profits made when assets such as shares, property or other investments are sold.

Child’s pension

A scheme that allows money to be invested on behalf of a child towards their retirement, with tax relief available on contributions.

Closed-ended investment fund

Investment vehicles such as investment companies that have a fixed number of shares in issue, which means that their share price is driven by investor demand. See also open-ended investment fund.

Currency risk

The risk that fluctuations in currency exchange rates will affect the return made on an overseas investment.

Dealing charge

The cost levied by a stockbroker or other share-dealing service to buy and sell shares in an investment company on your behalf.

Discount

Refers to investment company shares that are trading at a price below the value of the company’s underlying net asset value per share. This indicates the shares may be undervalued.

Designated account

An investment plan set up by one person but designated to another, e.g. a child. Designation allows you to retain ownership of the investment, with the option – but not the obligation – to transfer them to the other person at a later date, e.g. when a child reaches 18.

Dividend

The annual share of profits and income that an investment company chooses to pay out to its shareholders.

Emerging market

A country or region whose economy is at a relatively early stage of development.

Equity

Another name for an ordinary share – so called because each one gives the owner an equal share in a company. An equity holder is entitled to share in the company’s profits and vote on issues that affect the company. Equities are one of the main investment asset classes alongside bonds, cash and property.

Fixed income

Another name for bonds issued by governments, companies and other organisations that pay out a fixed and guaranteed income each year.

Gearing

The practice by some investment companies of borrowing money to invest alongside shareholder capital in order to boost or ‘gear up’ potential returns. Gearing can increase the risk profile of an investment company.

Gilts

A type of bond issued by the UK government.

HM Revenue & Customs (HMRC)

The UK government department dealing with tax.

Income tax

The personal tax payable on wages, other earnings and income generated by investments.

Individual Savings Account (ISA)

A UK investment plan that shelters investments held inside it from income tax and capital gains tax.

Infrastructure

The fundamental systems and facilities that allow a city or country to function effectively – such as transport, power and communications systems. In investment, infrastructure is often considered an asset class in its own right.

Inheritance tax

The tax that’s potentially payable on what a person leaves behind – their estate – when they die.

Investment company

A company listed on a stock market that looks to make its profits by investing in other companies and other investments.

Investment platform

A service that allows investors to buy, sell and manage investments online.

Investment trust

A type of investment company that specifically originated in the UK and that’s structured as a public limited company. Increasingly the terms ‘investment company’ and ‘investment trust’ are used interchangeably.

Investment manager

The individual or company tasked with managing the investment portfolio of an investment company or fund. Unless an investment company is self-managed, its board can change the investment manager if performance is not considered up to standard.

Junior ISA

An individual savings account for a child, with lower annual investment allowances than for an ‘adult’ ISA.

Key Information Document (KID)

The document provided to investors in a retail investment product or fund, outlining its features, risks and costs. KIDs have a standardised format to make it easier to compare different products.

Leverage

Another term for ‘gearing’.

Liquidity

In investment terms, refers to how easy or hard it is for an investment or asset to be bought or sold. Cash is the most liquid asset class while property and shares in private companies not traded on the stock market can be illiquid.

Listed company

A company that’s quoted – or ‘listed’ – or a stock market such as the London Stock Exchange, where its shares can be bought and sold. Many public limited companies (PLCs) including investment companies, are listed – although it is not a legal requirement in order to be a PLC.

London Stock Exchange

The main UK market on which shares and other securities are traded, including the shares of investment companies. The activities of the London Stock Exchange largely now take place digitally rather than in a physical market place.

Multi-asset fund

An investment funds that invests across a wide range of asset classes – which could include equities, bonds, cash, property and also hedge funds, commodities and private equity. Investing across so many asset classes can help to diversify risk.

Mid price

A value midway between the offer price and a bid price on a share or other security. Investment companies use the mid price of investments to value their investment portfolio. The mid price of an investment company is widely used to calculate its past performance.

NAV per share

A widely-used measure to assess the underlying value of a share in an investment company. The value of the net assets in an investment company is divided by the number of ordinary shares in issue. So if the total net asset value of an investment company is £100 million and there are 50 million shares in issue – the NAV per share is £2 (£100 million divided by 50 million). The NAV per share helps investors see if the current share price is good value or not.

Net Asset Value (NAV)

The total value of an investment company’s assets – primarily its investment portfolio – minus any outstanding costs, debts and loans.

Nominee

A company that holds shares, such as those of investment companies, on an investor’s behalf. Many share-dealing services and online investment platforms will buy and sell shares for their customers through a nominee, which can be more efficient and cost-effective. But as the nominee is the legal shareholder, investors need to check if shareholder rights such as receiving the annual report or voting at the Annual General Meeting will be passed on.

Offshore investment company

Typically refers to investment companies registered in offshore UK centres such as the Channel Islands. Being offshore used to confer some tax advantages over being registered on the mainland but these have diminished in recent years.

Ongoing charges

The costs that investment companies and other funds levy each year for investment management and administration. An ongoing charges figure aims to allow costs of different products to be compared on a like-for-like basis.

Open-ended investment fund

An investment fund which is constantly creating and cancelling units/shares as investors look buy into or sell out of it. Unit trusts and OEICs are both open-ended funds. Investment companies are closed-ended as they have a fixed number of shares in issue which are bought and sold on the stock market.

The unit or share price of an open-ended fund will always track the value of its underlying investment. A closed-end fund’s share price could be higher or lower than the value of its underlying investments, depending on market demand for its fixed pool of shares. However, because an investment company doesn’t have to worry about investors demanding their money back at any time, the investment team can take a longer-term view of the portfolio and invest in less liquid investments if it wishes.

Personal allowance

The amount of income an individual can earn each year in the UK before any income tax becomes payable.

Platform

An online venue on which investments such as investment companies, unit trusts and OEICs as well as other company shares and securities can be bought and sold and investors can view and manage their whole portfolio.

Public Limited Company (PLC)

A company whose shares are made available to the public – and where a shareholder’s potential liabilities are limited to the amount of money they have invested in the company’s shares (they can’t be pursued for any other debts or losses the company might have).

PLCs are strictly regulated in the UK and are legally required to disclose detailed information about their financial position. Most PLCs may be listed on a stock market such as the London Stock Exchange but this is not a legal requirement.

Premium

Refers to investment company shares that are trading at a price above the value of the company’s underlying net asset value per share. This indicates the shares may be overvalued.

Private equity

Shares in private companies that are not traded on a public stock market. Private equity funds can give access to investment opportunities not widely available to most investors – but they can also be harder to buy and sell and are therefore considered higher risk.

Proxy

A facility to allow shareholders to vote at annual general meetings if they cannot attend themselves. Shareholders in an investment company may be sent proxy forms listing the resolutions on which they are invited to vote.

Real Estate Investment Trust (REIT)

A specialist and tax efficient investment company created to invest in properties with rental income. REITs are a well-established and globally recognised structure for property investments. They provide investors with the opportunity to invest in a diverse portfolio of properties across different sectors.

Providing certain key rules are met, UK REITs do not pay tax on the profits from their rental income or on their capital gains, which can potentially boost returns. In particular, 75% of a UK REIT’s profits must derive from property or property-related investments and 90% of its rental income profits must be paid out to its investors each year. These payments are known as “property income distributions” (PIDs) and can be supplemented by normal dividends. Some categories of shareholders may elect to receive their PIDs gross, without a tax deduction, such as UK companies, charities, local authorities, pension schemes and managers of PEPs, ISAs and Child Trust Funds.

Registrar

The professionals who maintain an up-to-date register of all the shareholders in an investment company. The registrar ensures dividends are paid out to the correct individuals and that company information such as the annual report is sent out on time.

Regular savings plan

A share plan that allows regular monthly amounts to be invested into an investment company or other type of investment fund.

Self-invested personal pension (SIPP)

A personal pension where the individual has extensive freedom to choose which investments to hold in it.

Self-managed investment company

An investment company whose investment portfolio is managed by its own investment team – or by its directors – rather than appointing a third-party investment manager.

Share plan

A savings scheme offered by investment managers that allows both one-off sums and monthly amounts to be invested in the investment companies they manage.

Split-capital investment company

A type of investment company that offers more than one type of share class – e.g. capital shares for investors looking for growth and income shares for investors seeking a regular income.

Stamp duty

The 0.5% government tax levied when shares are purchased.

Stockbroker

A firm that can buy and sell shares on the stock exchange on an investor’s behalf. Increasingly, stockbrokers offer online share-dealing services.

Stock exchange

A public venue on which shares, bonds, warrants and other investments can be traded, with the latest market price of investments being published throughout the day.

Stocks & shares ISA

The type of individual savings account that can invest tax-efficiently in investment companies and other investments. The other main type of ISA in the UK is a cash ISA which can be used to hold bank and building society savings accounts tax efficiently

Tax relief

The repayment of tax that’s given on contributions into pensions and venture capital trusts to incentivise people to save for their retirement or to back small companies

Venture Capital Trust (VCT)

A type of investment company that invests in very small companies that are looking for capital to help grow their business. To encourage investors to support these small but higher-risk investments, VCTs offer some tax breaks. Investments into newly-issued VCTs attract tax relief, which can help to reduce the investor’s overall tax bill. Also, there is no capital gains tax to pay on any profits made when VCT shares are sold. Plus, profits from other investments won’t be subject to capital gains tax if they are reinvested in a VCT.

Volatility

The tendency for the market value of investments such as shares to rise and fall. The sharper these rises and falls are, the more volatile an investment is said to be. Deciding how much volatility you can accept in your investments is a key element of managing investment risk.

Yield

The income on an investment expressed as a percentage of its value. For example, if an investment company’s share price is 500p and it pays a dividend of 5p, its income yield is 1%.