Investment Conundrum

lindabea

Hello guys - need some help with an idea that's really bugging me!!

Just suppose I want to invest in a fund (nothing specific) and it's unit price is 0.01. I'll invest £1.00, and that will give me 100 units in that fund. Now, just suppose that a few months later, the unit price goes up to 0.50 and I will then invest another £1.00 which will then give me 2 units. So now my investment will consist of a total of 102 units - 100 units from the first £, but only 2 units with the second £.

To illustrate further, just suppose the unit price has gone up to £1. That would mean that the original 100 units would be worth £100 but the second 2 units would be worth £2.

Now here's my question.... does it follow therefore that as the unit price of a fund goes up, the potential scope for growth goes down. Does any of my reasoning make any sense?

enthusiasticsaver

Not sure any unit price would go up by 5000% in a few months but there are no guarantees one way or another. Most unit price trajectories follow a curve which goes up and down all the time but the movements are usually gradual and not as drastic as the scenario you paint. I would not imagine the potential for growth is affected one way or another though. The FTSE index has been going up gradually since 1984 with the occasional dips and possibly even before that but I cannot get data any earlier than that. There is no definite science when it comes to investing. The only thing you can say is you cannot time the market, let alone individual funds.

Malthusian

No. There are an infinite number of numbers available. What kind of unit do you think would be likely to grow by 50 times in a few months?

If the unit trust was restructured so that your 100 units at 0.01 became 10,000 units at 0.0001, its growth prospects would remain exactly the same.

There is a similar delusion exploited by boiler room scammers where they attempt to sell you some near-worthless share on the grounds that "it is easier for a 1p share to go to £1 than for a £1 share to go to £100". In reality both are equally unlikely.

cloud_dog

lindabea wrote: »

Hello guys - need some help with an idea that's really bugging me!!

Just suppose I want to invest in a fund (nothing specific) and it's unit price is 0.01. I'll invest £1.00, and that will give me 100 units in that fund. Now, just suppose that a few months later, the unit price goes up to 0.50 and I will then invest another £1.00 which will then give me 2 units. So now my investment will consist of a total of 102 units - 100 units from the first £, but only 2 units with the second £.

To illustrate further, just suppose the unit price has gone up to £1. That would mean that the original 100 units would be worth £100 but the second 2 units would be worth £2.

Now here's my question.... does it follow therefore that as the unit price of a fund goes up, the potential scope for growth goes down. Does any of my reasoning make any sense?

No and no.

Alz1986

Many Trusts will deliberately keep the unit price down by share splits to encourage investors. i.e it is easier to buy shares which costs £5 than it is when it costs £51 - particularly if you have a regular investment saving plan set up.

So if you're investing £1 regularly and the share price has exceeding that, you wont be able to buy anymore.

lindabea

enthusiasticsaver wrote: »

Not sure any unit price would go up by 5000% in a few months

Yes - I do understand that. I was simply using my figures as a hypothetical scenario. The values are not the issue.

My point is that as the unit price goes up, the number of units you're able to buy with the same amount of money at any given time, will go down.

In my scenario, whether the price goes up or down is not the issue. I'm making a point that as the unit price increases, the less units you're able to buy. This will then give you less scope for profit when the price continues to grow.

lindabea

Alz1986 wrote: »

Many Trusts will deliberately keep the unit price down by share splits to encourage investors. i.e it is easier to buy shares which costs £5 than it is when it costs £51 - particularly if you have a regular investment saving plan set up.

So if you're investing £1 regularly and the share price has exceeding that, you wont be able to buy anymore.

Great - this is interesting. Can you please explain the concept of
'share split' Do you mean that if I have 100 shares at £1/share, the unit trust can split these into 200 shares at 50p/share

LobsterMemory

This conundrum just boils down to "will I make more profit on £100 if I buy at a higher price or a lower price?" which isn't really a conundrum at all

lindabea

Malthusian wrote: »

There is a similar delusion exploited by boiler room scammers where they attempt to sell you some near-worthless share on the grounds that "it is easier for a 1p share to go to £1 than for a £1 share to go to £100". In reality both are equally unlikely.

Surely given time, both scenarios have an equal potential for a 100 times growth. Why do you say both are unlikely?

ColdIron

lindabea wrote: »

Great - this is interesting. Can you please explain the concept of 'share split' Do you mean that if I have 100 shares at £1/share, the unit trust can split these into 200 shares at 50p/share

Investment Trusts can and do issue stock splits because you can't buy a bit of a share. However you are talking about funds which generally don't have the need to as you can buy fractions of units

lindabea

LobsterMemory wrote: »

This conundrum just boils down to "will I make more profit on £100 if I buy at a higher price or a lower price?" which isn't really a conundrum at all

Not really, because you're only taking one side of the argument. The answer to your question is obvious - you will make more profit if you buy at at a lower price. But that's exactly the point. As the price goes up, the less units you're able to buy, so therefore the less scope for profit in future years.