What factors determine the premium on investment trusts?
There are various factors that may influence the premium on an investment trust. One of the main factors is the level of demand for the trust’s shares. If there are more buyers than there are sellers, the price of the shares will bid up. Plus, the performance of the trust’s underlying assets can also have influence. If the assets are performing well, investors may be willing to pay a higher premium for the trust’s shares.
The trust’s dividend yield can also have an affect. If the trust has a high yield, investors may be willing to pay a premium to own its shares. Finally, the level of competition in the market also determines the premium. If there are few similar investment trusts available, investors may be willing to pay higher for the one they can invest in.
How does this affect the return on investment in investment trusts?
The premium on an investment trust can have a major impact on the return that an investor receives. If an investor purchases shares in a trust that is trading at a premium, they will pay more for those shares than they would if the trust was trading at its NAV. As a result, even if the trust’s underlying assets are performing well, the investor’s return would be lower than it would be had they purchased shares at NAV.
On the other hand, if an investor purchases shares in a trust that is trading at a discount to its NAV, they will pay less for those shares compared to if the trust was trading at its NAV. This means that if the underlying assets of the trust perform well, the investor would receive a higher return compared to if they had purchased shares at NAV.
How premium calculated?
Investors can use a relatively straightforward formula to calculate the premium on an investment trust. To calculate the premium, you must first know the trust’s NAV and its share price. Divide the difference between the share price and the NAV by the NAV, and then multiply that number by 100 to get the percentage premium.
Understanding what a premium is and how it can impact your returns is essential when investing in investment trusts. While it can be a positive sign that a trust is in high demand and has strong underlying assets, it can also mean that an investor will pay more for their shares than they would if the trust was trading at its NAV.