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Institutional Investments - Essay Example

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Why do Investment Trusts trade at a Discount? This article is aimed at focusing the reasons behind the trading of investment trust shares at a discount. At the beginning of this article, investment trusts are explained along with their differences with the investment companies…
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Institutional Investments
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Institutional Investments

Last part of this article would highlight some of the tactics devised in order to control discount trading of investment trust. Summary at the end of this article would conclude this article. Investment Trusts Investment trusts are those types of companies, which are provided the domicile of United Kingdom such that they are listed in the London Stock Exchange. They mainly invest in the equities and securities of the companies across the world, which are listed in different stock exchanges (Redhead, 2008). These investment trusts are run by the panel of the independent directors who take care of the affairs of the investment trusts. Investment trusts are somehow different with the investment companies such that investment companies are domiciled outside the jurisdiction of UK such as Jersey or Guernsey (Redhead, 2008). Pricing of Investment Trusts The pricing of investment trusts are made based on a conceptual term named as Net Asset Value or NAV. Net asset value is the market value of all the investments held by the investment companies. Therefore, the market value of any investment trust is actually the NAV of the investments (Levy and Post, 2005). In case if the market value of the shares issued by the investment trust exceeds NAV, then this concept refers as the shares of the investment trusts are trading at a premium. ...
This means that the shares of the investment trust are trading at discount. Very occasionally, it appears that the investment trust share is trading at a premium. The following discussion entails the factors that cause the investment trust shares trading at a discount. Investment shares trading at a discount can be regarded as one of the integral aspects that operate behind the performance of the investment trust. The measurement of the shares of the investment trusts can be made in two ways. Firstly, the share price of the investment trusts quoted at the stock exchange. Secondly, market value per share of the assets of those companies, which are held by the investment trusts. In this way, discount can be calculated by simply taking the difference between the price per share of investment trusts and net assets value divided by the net assets value. Principally, the discount is regarded as the function of demand and supply mechanism for the shares of the investment trust. However, the discounts, and specifically the fluctuations in discounts are more important and follow some basis rules, which help understand the problem of investment trust shares trading at a discount more consistently. In case if the discount rate increases, this indicates that there are more chances that the discounted shares will be priced higher in future. This suggests that the investment trust shares are quite attractive especially against those investment trust shares, which are currently trading at a premium (Baums and Buxbaum, 1994). However, this mechanism is not as easy and simpler as it appears, had there been such a potential in the discounted investment shares for a possible price increase, the whole market ... Read More
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