A Newbies (short) Guide to Investing - No Advice Given *under construction*

purch

but its not an investment as there is no future financial return (other than possibly getting your wallet back)

That would be deemed a ultra high risk Investment :eek:

You could possibly break even, but not necessarily.

Amend that to:

Putting your money at risk with the intention of making a positive return.

earlgrey_3

Lokolo wrote: »

Investment Trusts -

These are a lot like Unit Trusts but they are run by companies. You give them your money and they put the money into how they see fit so that hopefully you will get a return.

Is that correct?
How are they different from Unit Trusts?

No, not exactly. Investment Trusts are companies and as such are quoted on the stock exchange and have a board of directors elected by the shareholders. They are essentially companies that invest in other companies though they may also invest in other asset classes such as property and bonds.

To invest in ITs you buy their shares on the stockmarket through a broker. The shares may sell at a premium or at a discount to NAV - net asset value. That is to say the shares may trade at a price that's above or below the actual value of the underlying assets the company owns.

The vast majority of IT shares trade at a discount to NAV which is a very good reason never buy new issues as they are likely to move to a discount at some point. For example, the biggest of all the ITs, Alliance Trust, is one of the FTSE100 and currently trades at a discount of 20.5% to NAV. You should only buy at a premium if you fully understand the reason for the premium and know it to be justified by exceptional circumstances.

Some ITs can have different classes of shares including capital shares, dividend shares, and zeros. Unfortunately there was an enormous mis-selling scandal by advisers around 8 years ago and general hanky panky by some IT companies known as the "Magic Circle" that tainted that form of investment trust - even though the actual investment format properly managed can be very valuable to some investors for tax purposes.

A major advantage of ITs is that the management costs are usually much lower than Unit Trusts. The costs can be just 0.5% pa whereas UTs can be 1.5 - 2% pa with a third of that going to your financial adviser each year as "trail commission".

Annual costs make a huge difference to final returns. If you are lucky enough to get a return of 3% over inflation on your unit trust investment, paying half of that for management makes a big hole in your return. There is no commission on IT shares bought on the open market just the usual brokerage fees.

One problem has been that many unit trust management companies have since moved in to set up their own investment trust companies managed under contract by themselves with fees as high as unit trusts. Although average management costs have risen many ITs still have very low costs which are published by the AIC.

Investment Trusts also have the advantage of being "closed end funds" unlike unit trusts. With unit trusts, when people invest the funds have to buy more shares with all the costs involved. If a lot of people want their money back they have to sell shares even if it's a bad time to do that. With an IT shares can be traded between investors on the stockmarkets without the IT itself being involved in the sale and having to buy or sell holdings. An IT isn't forced to sell when prices are low or buy when prices are high and so has more flexibility. ITs can also borrow to invest.

When you buy IT shares at discount you buy an interest in the companies they've invested in at a lower cost than if you bought those shares/assets directly. With a UT you must pay the full value of the fund's assets.

A disadvantage can occur if the discount on IT shares you hold increases. If a company invests badly the shares they buy can go down and the discount widen which therefore increases the loss for the investor. Conversely, when a discount narrows the investors gain. Similarly, while the ability to borrow can increase profits it can also increase risks.

If the discount for an IT becomes too large the shareholders can sometimes force the IT company to liquidate its assets to release profits.

In practice, the value of a conservatively run global IT such as Alliance Trust or Foreign and Colonial will be far less volatile than an aggressive UT. At one time investors in ITs were expected to be more sophisticated than for UTs with less government regulation but this has changed in recent years.

The Association of Investment Companies website is at http://www.theaic.co.uk/

Whoops, I got carried away there. :rolleyes:

Lokolo

Ok so I've edited a bit more of it. Looks ok so far.

Not sure if I should go into more detail about funds and shares or not? Leave that for the expert sites (fool, morningstar etc.)

I think the basic outlines decent though....

[Deleted User]

Would it be worth setting up a wiki?

A few pointers on how to do this - http://www.wikihow.com/Start-a-Wiki

Two options for creating the wiki's would be Dokuwiki and Mediawiki and there's a pretty decent video for Dokuwiki here - http://www.idratherbewriting.com/video/dokuwiki.html

gozomark

Gilts are given out by the government and have a return at maturity, you can choose to pull out early but the interest gained over this period will be a lot less than it would if you do keep it in.

I think you are mixing up with NS&I

should be

Gilts are issued (ie sold) by the government and have a return of capital at maturity, and trade on the stockmarket. The price of gilts moves inversely to the expected trend in interest rates. If you buy at issue and sell before maturity you may gain or lose on your capital invested

Lokolo

gozomark wrote: »

Gilts are given out by the government and have a return at maturity, you can choose to pull out early but the interest gained over this period will be a lot less than it would if you do keep it in.

should be

Gilts are issued (ie sold) by the government and have a return of capital at maturity, and trade on the stockmarket. The price of gilts moves inversely to the expected trend in interest rates. If you buy at issue and sell before maturity you may gain or lose on your capital invested

Changed

Deleted_User wrote:

Would it be worth setting up a wiki?

A few pointers on how to do this - http://www.wikihow.com/Start-a-Wiki

Two options for creating the wiki's would be Dokuwiki and Mediawiki and there's a pretty decent video for Dokuwiki here - http://www.idratherbewriting.com/video/dokuwiki.html

Maybe. I just think people wouldn't look at it, rather than with this stickied people may look at it.

[Deleted User]

Lokolo wrote: »

Changed



Maybe. I just think people wouldn't look at it, rather than with this stickied people may look at it.

Might it be good for people to edit and change it - save you doing all the leg work? I've never actually set one up but the theory sounds good...

Lokolo

Deleted_User wrote: »

Might it be good for people to edit and change it - save you doing all the leg work? I've never actually set one up but the theory sounds good...

Yep agreed. If this thread comes off the map by weekend I shall start making a Wiki and put that up instead.

Blah99

- Property (? Valid ? Yes No?)

Property is a valid investment class as long as you are aware of the risks and issues involved. It's a very illiquid asset plus it's vulnerable to emotional association - buying a property to live in is absolutely and totally different to buying a house to flip or rent out.

Aside from directly investing in property by buying it yourself you can also:
- Invest in a REIT (real estate investment trust)
- Gain exposure through the market (eg: by buying a housebuilder or land holder)
- Invest in a hotel room

Buying and selling property is, in my opinion, one of the more difficult ways to make money. It carries massive risk and requires massive investment in an illiquid asset. It also goes without saying that all the companies offering to make you a property millionaire (no names mentioned but I'm sure we can all picture the advert) are talking absolute rubbish.

Shares are the basic building blocks of investing. Once a company gets big they tend to start trading on the stockmarket.

This isn't necessarily true. Shares are the mechanism that underpins company ownership in the UK. Even if you open your own Limited company business with one employee, the incorporation process requires that you issue at least 1 share to yourself - the owner. That means all private limited companies also have shares issued, and some of them allow select groups of people to purchase them (for example, I believe everyone who works for John Lewis can buy shares in the company, but it's still a private family owned business that isn't floated on a stock market).