Unit trusts and OEICs
Many thousands of pounds can be made and lost on world stockmarkets. Most shares are traded by large institutional investors like unit trust companies, insurance companies, investment companies and banks. With an average share price in the UK FTSE 100 of £2.50, it would be difficult indeed for an individual to buy enough shares in a company to share in the fortune of a rising share price. Added to that, there is the question of which share to buy.
It is the case that around 50% of the main market referred to above is made up of only 10 different companies. However, these companies represent only 4 sectors: Banks, telecommunications, oil and pharmaceuticals.
If you do manage to select one share in which you'd like to invest, are you going to monitor its performance throughout the day? Will you be able to sell your holding or indeed add to it if necessary? Can you afford to do so? Can you afford the dealing charges? The answer to these questions for the bulk of us is NO. So what is the alternative?
One solution is to invest your money in a unit trust, OEIC or investment trust. Investment trusts are discussed in a separate section. Unit trusts and OEICS are very similar. The principles of each are the same.
Try to imagine a dozen or so people in a room who all share the same investment goal. They stand in a circle and in the centre of a room is man holding a box. Each of the group put some money into the box. The amounts may vary from £1000 upwards, but each of the group will wish to put in different amounts, depending on their own circumstances. This man is called a trustee. He holds the money on behalf of the investors in the group. His company is usually a bank. The group of investors now sit in their seats and another man or woman enters the room. That person is the fund manager. They decide what investments should be bought with the money in the box. However, the fund manager does not get to touch the money. When shares are to be bought, it is the trustee who buys the shares. If the manager wishes to sell, he or she will instruct the trustee to do so and the trustee handles the sale. This provides very good security for the group of investors.
The benefit of this whole arrangement is that the investor who puts £1000 in the box has their money added to tens of thousands of other monies, allowing the fund manager to buy many different company shares. This could be as many as 90 different shares. Going back to our average share price in the FTSE 100 index, you will recall that the price was £2.50. If one considers the costs of dealing at maybe £15.00 per transaction, it would really only be possible to buy perhaps 4 shares, if one were to hold say, 100 shares in each company. Of course this would be fewer shares if the price to buy was above £2.50.
Looking at the costs of buying and selling, the investor would require to make at least 6%, just to cover the cost of selling again. I think you can see that it is beginning to become difficult for the small investor to be active and get a spread of shares.
So, by investing in a Unit Trust or an OEIC, an individual can invest in the market and have a great spread of investment that will be professionally managed every day. Because of the size of one of these funds, the dealing charges are substantially reduced.