Step-by-Step guide to investing: seminar 7

MORE ABOUT THE DISCOUNT

In the last seminar we saw that because of a small discount to NAV, you can buy Neil Woodford's expertise at a bargain price through The Edinburgh Investment Trust

What are the other effects of a discount?

• When markets are rising, the discount tends to close as more investors are attracted. When markets are falling, the discount tends to widen. If you think markets will rise over the next 10 years, then now is the time to buy, because you will benefit from both the market gains and the closing of the discount.

• If the discount gets too wide, shareholders might demand that the trust be wound up. You will thus receive the value of the NAV per share in cash - even though you might have bought them for 20% less! Look at what is happening now at the Welsh Industrial Investment Trust

• A trust with a discount delivers a dividend boost - because the dividend comes from the NAV, not from the share price. 

In the next seminar we will look at trusts to buy (and why).