The risk of directly investing in a single investment is that if the price drops in value, or the issuing company goes bust, you could lose money.

A way of reducing this risk is having a spread of investments in different types of a particular asset. So rather than buying shares in one company, you might buy shares in ten different companies to diversify your portfolio and help spread the risk around.

Reducing risk
Unit trusts and Open-Ended Investment Companies (OEICs) are forms of shared investments, or funds that allow you to pool your money with thousands of other people and invest in world stock markets. Unit trusts have proved incredibly popular because by investing in a broad spread of shares your spread and therefore risk is reduced. But they are gradually being replaced by their modern equivalent, the OEIC (pronounced ‘oik’).
While the underlying structure of these two types of investments differ for the investor they operate in the same way.

Both investment vehicles pool your money with other people’s to invest in:

– a spread of shares or bonds
– or other investments
– or a combination, depending on their investment objectives

You can buy and sell ‘units’ or ‘shares’ respectively at any time, and the price you receive is based on the value of the underlying assets the fund has invested in.

Market demand
Investment trusts are like unit trusts and OEICs. When you invest in an investment trust, your money is pooled with other people’s to invest in a wide spread of assets. But an investment trust is a company that is traded on the stock exchange with a fixed number of shares of its own. This means that, unlike the other pooled investments, the price you pay reflects the market demand for the investment trust shares rather than the value of the underlying assets.

So sometimes you’ll buy at a ‘premium’ to the asset value or, in other words, pay more than the underlying value. Other times you’ll buy at a ‘discount’ or pay less than the underlying value.