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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, and the share price is at a sufficient 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. The principal reasons for such share buy backs are:

  • to enhance net asset value for continuing shareholders by purchasing shares at a discount to the prevailing net asset value;
  • to manage imbalances between the supply of and the demand for the Company's shares which exacerbates any discount of the quoted market price to the published net asset value per share.

 

Closed-ended
Investment trusts are 'closed-ended' because they have a fixed number of shares in issue. This means that the market price is affected by the supply of and demand for shares. 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 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 stock 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 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
A dividend is any income from an equity investment, paid from the profit made by a company. Some investment trusts pay dividends on a quarterly or monthly basis but the majority pay dividends twice yearly. If you invest in an investment trust savings scheme, you can have dividend income reinvested in the plan, boosting the return by increasing your shareholding and any income you receive in the future.

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.

Individual Savings Account (ISA)
An ISA is a tax-efficient account in which you can hold assets in two separate component parts (cash, and stocks and shares). There is a limit to the amount you can invest in ISAs each year. Although tax credits on UK dividends cannot be reclaimed by ISA holders, capital gains made can roll up free of tax, and any income or interest earned is free of basic and higher rate income tax.

Tax rates and reliefs may change at any time and the value of any tax benefits will depend on your individual circumstances.

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. Investment trusts can invest in a wide variety of other assets including property, bonds and cash. They are subject to special tax rules which mean gains made when their portfolio investments are sold are free from UK tax.  Holders of investment trust may of course be subject to tax on capital gains when these holdings are themselves sold.

Management charge
The directors of an investment trust generally appoint an external investment manager to run the investments of the trust. Management charges are 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 and make money by selling at the offer price but buying at the lower ‘bid' price.

Market price
There are two market prices quoted: 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 market makers 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
A price calculated as the mid-point between the bid and offer prices. See Dealing spread. The mid-market price is used to calculate the discount, yield and share price performance data that appear on the AIC's website, and it is usually used to calculate market capitalisation.

Net asset value (NAV)
Investment trusts normally invest in shares, but some can hold other assets like properties and bonds. The total asset value is the total market value of all of a trust's investments and other assets. The net asset value is the total asset value less the value of liabilities - borrowings and anything owed to other creditors. This figure is equal to shareholders' funds. This may differ from a trust's market price.

Net Asset Value (NAV) per share
Net asset value divided by the number of shares in issue during a year.

Open-ended fund
A pooled fund for which the number of units or shares in issue (and so its NAV) increases or decreases 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 an Investment  Company with Variable Capital (ICVC) which issues shares rather than units.

Ordinary shares
The main type of equity capital issued by companies and by conventional investment trusts. Investors are entitled to their share of both income (in the form of any 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 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 UK shares, property and businesses. All share purchases of UK shares incur 0.5% stamp duty on their value. Other types of UK assets suffer stamp duty 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 (excluding any interest on borrowings) by the average net assets and expressing the results as a percentage.

Total assets
Total assets are the total value of all the company's investments before deducting any liabilities or borrowings used for gearing/investment purposes.