We’d like to remind Forumites to please avoid political debate on the Forum.
This is to keep it a safe and useful space for MoneySaving discussions. Threads that are – or become – political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.
📨 Have you signed up to the Forum's new Email Digest yet? Get a selection of trending threads sent straight to your inbox daily, weekly or monthly!
Bid - Offer Price, Discount and Dividend Yields
darkvader
Posts: 267 Forumite
As we look to finalize our ITs, there are some key things we need to consider and want clarified
1. I do know what the bid-offer spread is however does this mean buying today and selling in 10 days is likely to result in a much higher loss than doing the same with UTs (given that there is no such spread?)
2. What in the world is the discount and premium ratios? Most funds I have seen have a higher offer than bid price which makes sense. So how does discount factor in at all?
3. NAV - When some sites show returns over 1/3/5 years they show share price and NAV returns - what's the difference?
4. Dividend taxation - If I invest outside of an ISA, then will dividends be taxed at 40% (my slab)? Will it make sense to instead put in an ISA for my wife who is at 20% slab? I know the long term merits of avoiding CGT but I dont think we will reach those levels.
Finally, whats more important in terms of return if we are investing for the long term - dividend yield or share price?
1. I have seen funds where the share price today is 20% lower than 5 years back yet it says it actual return is above 40% - is this because of all the dividends paid out?
2. If we always reinvest dividends, then when we sell in 5/10/15 years, its more likely to give us a decent profit rather than loss even though the share price is 20% below our purchase price, factoring in div reinvestments? (I am referring to share price being low not because of market crashes)
Sorry for the long post, but we are getting confused more than before!
Thank you
DV
1. I do know what the bid-offer spread is however does this mean buying today and selling in 10 days is likely to result in a much higher loss than doing the same with UTs (given that there is no such spread?)
2. What in the world is the discount and premium ratios? Most funds I have seen have a higher offer than bid price which makes sense. So how does discount factor in at all?
3. NAV - When some sites show returns over 1/3/5 years they show share price and NAV returns - what's the difference?
4. Dividend taxation - If I invest outside of an ISA, then will dividends be taxed at 40% (my slab)? Will it make sense to instead put in an ISA for my wife who is at 20% slab? I know the long term merits of avoiding CGT but I dont think we will reach those levels.
Finally, whats more important in terms of return if we are investing for the long term - dividend yield or share price?
1. I have seen funds where the share price today is 20% lower than 5 years back yet it says it actual return is above 40% - is this because of all the dividends paid out?
2. If we always reinvest dividends, then when we sell in 5/10/15 years, its more likely to give us a decent profit rather than loss even though the share price is 20% below our purchase price, factoring in div reinvestments? (I am referring to share price being low not because of market crashes)
Sorry for the long post, but we are getting confused more than before!
Thank you
DV
0
Comments
-
An IT is fundamentally different to a UT and understanding the difference will answer most of your questions. Before buying any IT shares make sure you know exactly what they are and how they differ from a UT.
The value of one unit in a unit trust is the value of all the assets divided by the number of units issued. If a new investor wants to buy more units then the investment company make those units and invest the money. This is known as an Open Ended investment.
The value of one SHARE of an investment trust is the price that it trades for on the stock market. An investment trust also has the Net Asset Value (NAV) which is the total of all the assets they own divided by the number of shares. If this is more than the share price then the shares are at a discount and if more than the share price then it is called a premium. If a new investor wants to buy a share in an IT then they do so on the stock market. The number of shares in issue does not alter as a result of them buying - hence the name Closed Ended ie fixed number of shares.
It can be good to buy at a discount - you can get £1 of assets for 80p for example but then not such a bargain if the discount drops further.
You can see from above that the return for NAV will be different to the one for share price. Unlike a UT when there is only one return figure based on the unit price.Remember the saying: if it looks too good to be true it almost certainly is.0 -
I think jimjames covered most of your questions, here are the answers to the rest.
Yes, as long as your provider discounts all the initial charge on the Unit Trust for you. Investment Trusts are shares so there will be a bid/offer spread and stamp duty to pay. However ongoing charges tend to be lower so they are a good choice for the longer term.1. I do know what the bid-offer spread is however does this mean buying today and selling in 10 days is likely to result in a much higher loss than doing the same with UTs (given that there is no such spread?)
Yes, if outside an ISA use the lowest tax payer. However ISAs offer another advantage - you don't have to list them on your tax return. An advantage for me as I have to do a tax return every year.4. Dividend taxation - If I invest outside of an ISA, then will dividends be taxed at 40% (my slab)? Will it make sense to instead put in an ISA for my wife who is at 20% slab? I know the long term merits of avoiding CGT but I dont think we will reach those levels.
No simple answer. There are income stocks and there are growth stocks. For example small companies just starting out can not afford to pay dividends but might grow fast (or fail). In the current uncertain environment with low share prices income stocks look the most attractive to me, though I do dabble in "recovery" stocks too which I hope will bounce back.Finally, whats more important in terms of return if we are investing for the long term - dividend yield or share price?
Possibly. You would have to point us to an example. Alternatively it might be referring to the difference between the share price and the NAV.1. I have seen funds where the share price today is 20% lower than 5 years back yet it says it actual return is above 40% - is this because of all the dividends paid out?
Compound interest is a wonderful thing and the longer you invest the better it gets. However whether it compensates for both a possible fall in the share price and inflation depends on how much income you get. If you go for a growth fund with few dividend payments it's going to be very different to a high income fund.2. If we always reinvest dividends, then when we sell in 5/10/15 years, its more likely to give us a decent profit rather than loss even though the share price is 20% below our purchase price, factoring in div reinvestments? (I am referring to share price being low not because of market crashes)0 -
Thank you both very much,
When I read it last night I was quite confused but this morning, everything fell into place
1. Discount is when the Share Price is lesser than the NAV - good time to buy
2. Premium is when the Share Price is higher than the NAV and thus you pay more than its total asset value
3. Looks like going down the ISA route for the missus is a better option as I dont want to lose in taxes nor do I file my own taxes
My confusion on the bid - offer was due to different sites I used to read up on ITs. I guess if a UT charges 5% initial investment fee and I sell those funds next morning, I will be at a loss of 5 % so makes no difference really.
The only question I now have is - when we purchase shares, what are we paying against? Yes, I know it will be the Share Price and not NAV - but am I right in assuming the bid-spread is quoted against this share price? Also, how do I find ITs that dont have a high bid-offer spread so I dont a lot on initial fees?
Cheers
DV0 -
4. Dividend taxation - If I invest outside of an ISA, then will dividends be taxed at 40% (my slab)? Will it make sense to instead put in an ISA for my wife who is at 20% slab? I know the long term merits of avoiding CGT but I dont think we will reach those levels.
Your other questions have been answered but not this one.
See this page -
http://www.direct.gov.uk/en/moneytaxandbenefits/taxes/taxonsavingsandinvestments/dg_4016453
There is no further tax to pay for a basic rate tax payer, but dividends can push you up a tax bracket.
If you want to get fancy, you can use ISAs for things that generate income (bonds, some UTs, some income from REITs) and unwrapped for things that generate dividends (shares including ITs).
Tracking dividends and CGT isn't difficult but you MUST keep good records as you go along.I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.
Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.0 -
I've got as S&S ISA where I invest in UTs while the missus just has a cash ISA. From what I have read, its best to open an S&S ISA and invest in ITs through that channel - avoids tax on dividends and we dont need to keep track as its all tax free in our hands
If we ever cross our ISA thresholds, I will open a standard share plan for OH as she is, and will be, at 20% for quite some time which reduces hassles of ever going over anytime soon
DV0 -
We also keep all unwrapped holdings in my wife's name. It means we have to constantly worry about CGT, but I love banking the dividends without paying any tax.I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.
Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.0 -
gadgetmind wrote: »We also keep all unwrapped holdings in my wife's name. It means we have to constantly worry about CGT
does it? can't you use your own CGT allowance by transferring shares from your wife to youself and then selling them immediately? i thought that worked (only for transfer between married couples).0 -
grey_gym_sock wrote: »does it? can't you use your own CGT allowance by transferring shares from your wife to youself and then selling them immediately? i thought that worked (only for transfer between married couples).
Yes, you can do that, but we're both up to the hilt with gains so we use both 0% allowances and her 18% band. If I suffer a fat finger moment, or there is a corporate action, we could hit 28%.
Juggling!I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.
Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.0 -
ok, so what you're really saying is that your investments have gone up too much
0 -
grey_gym_sock wrote: »ok, so what you're really saying is that your investments have gone up too much
The unwrapped ones have gone up to much and those in ISAs too little!I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.
Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.0
This discussion has been closed.
Confirm your email address to Create Threads and Reply
Categories
- All Categories
- 352.1K Banking & Borrowing
- 253.6K Reduce Debt & Boost Income
- 454.3K Spending & Discounts
- 245.2K Work, Benefits & Business
- 600.8K Mortgages, Homes & Bills
- 177.5K Life & Family
- 259K Travel & Transport
- 1.5M Hobbies & Leisure
- 16K Discuss & Feedback
- 37.7K Read-Only Boards