One of the other key differences between investment trusts and unit trusts is that investment trusts are able to loan money to fund their investments, often referred to as â€śgearing upâ€ť as opposed to unit trusts who are unable to do so. This form of investing can work for or against the investment trusts depending on whether their share price increases or decreases. Investment trusts are also able to invest in unquoted or unlisted companies meaning they are not traded publicly on the stock exchange. This is usually down to reasons, either the company chooses not to and prefers to keep itself privately owned or merely because they fail to meet the necessary criteria to become publicly traded. However, the ability to trade in these companies as well as the ability to take out loans to finance investments, can make investment trusts quite a risky investment. If not managed correctly these funds can suffer due to these loans or the volatility of companies that are not publicly traded.
The net asset value, otherwise known simply as the NAV, is the market value of the entirety of the assets held by the investment trust after the subtraction of any liabilities it may have. The net asset value per share is the NAV of the investment trust divided by the market capitalisation (otherwise known as the amount of shares the trust has issued). The share price of the investment trust increases and decreases depending, as with normal shares, on the supply and demand for itâ€™s shares within the stock market. The share price is then described as being at a â€śdiscountâ€ť or â€śpremiumâ€ť to the net asset value of each share.
â€śDiscountâ€ť, describes a share price that is lower than the net asset value of the share, meaning that investors are able to purchase shares in the trust at a lower fee than the real stock market value of the trusts actual assets. In contrast, shares are defined as being at a â€śpremiumâ€ť when the stock market value is higher than the net asset value, meaning that investors would be purchasing the stock at an increased price in comparison to the true value of itâ€™s assets. These two are ways of measuring potential performance of an investment trust.