Investment Companies

Featured Guide

How do they work?

A diversified portfolio
Investment companies hold a broad range of assets, which can include shares, securities, and property. This means your investment is diversified and is not exposed to the fortunes of just one or a few investments.

Investment companies are closed-ended and are listed on a stock exchange and therefore raise money for investing by issuing shares. Generally, this happens once – when the company is created.

Board of directors
Each investment company has a board of directors which meets several times a year and monitors the company’s performance. The board has a legal duty to uphold the interests of its shareholders.

Fund management and fund management groups
The board appoints a fund manager who makes the day-to-day decisions about what shares and other investments to buy and sell. Most companies are managed by an external fund management group, which may provide fund management services to a number of companies.

Companies that have no external fund management firm involvement are called ‘self-managed’. This means the board of directors selects and employs a salaried fund manager (or managers) directly.

Investment objectives
These companies specialise in what they aim to achieve for their shareholders. Some try and maximise income. Others aim exclusively for capital growth. Some companies aim to provide a combination of income and capital growth. Companies often specialise in particular sectors and types of company.

Some might specialise, for example, in biotechnology companies or alternative energy producers. Others specialise in investing in companies from certain parts of the world, for example the UK or Japan. All companies have investment objectives that will be clearly stated in their literature.

Investment companies can borrow to purchase additional investments, known as ‘gearing up’. Gearing is explained in more detail below.

Discounts and premiums
The price of an investment company is determined by the supply and demand of its shares on the stock market. The share price of an investment company is determined by the stock market and is often different to its NAV, the Net Asset Value (NAV).

The NAV is the net value of all the company’s assets having deducted liabilities, divided by the number of shares.

The difference between the share price and the NAV is known as a discount or premium.

If an investment company’s share price is more than the Net Asset Value (NAV), the company is said to be trading at a premium; if it is less, the company is trading at a discount. It is more common for investment companies to trade at a discount.

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