Investors accustomed to buying and selling traditional open-ended funds — unit trusts and OEICs — sometimes assume investment trusts work the same way, only to find the dealing process, pricing, and terminology feel noticeably different. That difference is not incidental. Investment trusts are, structurally, listed companies rather than pooled investment funds in the conventional sense, and this fundamentally changes how they are bought and sold. Understanding this distinction helps UK investors avoid confusion and dealing errors when adding investment trusts to a portfolio.
The core structural difference
An open-ended fund such as a unit trust or OEIC creates new units when investors buy and cancels units when investors sell, with the fund itself expanding or contracting in size to absorb these flows, and every transaction dealt at a single daily valuation point, based on the fund's net asset value (NAV) per unit at that time.
An investment trust, by contrast, is a fixed number of shares in a public company, listed on the London Stock Exchange. It does not create new shares or cancel existing ones simply because investors want to buy or sell (although it can issue new shares or buy back existing ones under specific board-approved processes, as discussed elsewhere in this guide). Instead, existing shares change hands between buyers and sellers on the stock exchange, in exactly the same way as shares in any other listed company, such as a bank or a retailer.
Why this means dealing through a stockbroking account
Because investment trust shares trade on an exchange rather than being created and cancelled directly by a fund manager, buying or selling them requires a stockbroking-style dealing facility — the same mechanism used to buy and sell ordinary company shares and ETFs — rather than the simpler "fund deal" process used for open-ended funds. In practice, most UK investment platforms offer both facilities within a single account, so an investor does not typically need a separate account for shares versus funds, but the underlying dealing mechanism and its characteristics are genuinely different.
Key practical differences investors will notice
- Live pricing throughout the trading day, rather than a single daily valuation point — an investment trust's share price moves continuously while the stock exchange is open, in the same way as any listed company's share price.
- A bid-offer spread between the price at which shares can be sold and the (typically slightly higher) price at which they can be bought, similar to the spread mechanism described for ETFs elsewhere in this guide.
- Order types such as market orders and limit orders, allowing an investor to specify a maximum buying price or minimum selling price, which is not a feature of traditional daily-dealt open-ended fund transactions.
- Dealing charges that may follow a platform's share-dealing fee structure rather than its fund-dealing fee structure, which can differ meaningfully — some platforms charge a flat fee per trade for shares and investment trusts, while fund dealing may be included within an annual percentage charge, or vice versa.
- Settlement conventions typical of exchange-traded securities, generally settling within a couple of business days of the trade, similar to ordinary shares.
The discount and premium to net asset value
Because investment trust shares trade at whatever price buyers and sellers agree on the open market, that price can differ from the trust's underlying net asset value (NAV) per share — the value of its actual portfolio divided by the number of shares in issue. When the share price sits below NAV, the trust is said to trade at a "discount"; when above, at a "premium".
This is a genuinely distinctive feature of the investment trust structure with no direct equivalent in open-ended funds, where units are, by design, always transacted at NAV (subject to any swing pricing or dilution levy adjustment, as discussed elsewhere in this guide, which adjusts the NAV itself rather than creating a separate market price). A widening or narrowing discount can affect an investor's returns independently of how the trust's underlying portfolio actually performs, which is an additional dimension worth understanding before buying an investment trust.
A worked example
Suppose an investor wants to buy £5,000 of shares in a hypothetical investment trust whose portfolio has a net asset value of 100p per share, but whose shares are currently trading on the stock exchange at 95p, reflecting a discount of roughly 5% to NAV. The investor places an order through their platform's share-dealing screen, sees a live bid-offer spread around the 95p level, and can choose to place a market order (dealt promptly at the prevailing price) or a limit order (specifying, for example, that they are only willing to buy at 94p or below). If the trust's underlying portfolio value later rises by 5% but the discount to NAV also narrows to 0% over the same period, the investor's shares would rise by more than 5% in price terms, since both the portfolio's value and the discount contributed to the share price move. Conversely, if the discount widened instead of narrowing, the share price could underperform the portfolio's actual NAV growth, or even fall, despite reasonable underlying investment performance. This example is illustrative and hypothetical, using simplified figures purely to demonstrate how discount movements interact with underlying portfolio performance.
Comparing the dealing experience
| Feature | Open-ended fund (unit trust / OEIC) | Investment trust |
|---|---|---|
| Where units/shares are created | Created and cancelled by the fund manager to match investor demand | Fixed share count, traded between existing buyers and sellers on the exchange (subject to specific board-approved issuance/buybacks) |
| Pricing | Single daily valuation point, priced at NAV (subject to any swing pricing) | Continuous live market pricing throughout the trading day |
| Relationship to NAV | Always transacted at NAV (as adjusted) | Can trade at a discount or premium to NAV |
| Order types | Simple buy/sell instruction at the next valuation point | Market and limit orders available, as with ordinary shares |
| Typical dealing charge structure | Often included within platform's fund charges | Often follows the platform's share-dealing fee structure |
Gearing adds a further dimension not present in open-ended funds
Investment trusts are also able to borrow money to invest, a practice known as gearing, within limits set by the board. This is another structural feature that follows directly from the trust being a company rather than an open-ended fund, since a company can take on debt in a way a traditional unit trust or OEIC generally cannot in the same manner. Gearing can amplify a trust's returns relative to its underlying portfolio in both directions — increasing gains when the portfolio rises in value, but also increasing losses when it falls, since borrowed money still has to be repaid regardless of how the underlying investments have performed. Combined with the discount and premium mechanism, this means an investment trust's share price can, at times, move by more than a simple percentage read of the underlying portfolio's performance might suggest, which is a further reason the stockbroker-style dealing process and live pricing described above matter in practice, rather than being a purely administrative distinction from open-ended fund dealing.
Practical steps when buying an investment trust
- Locate the trust using its ticker or share code on the platform's share-dealing (not fund-dealing) search facility.
- Check the live bid-offer spread and the trust's current discount or premium to its most recently published net asset value.
- Decide between a market order (dealt promptly at the prevailing price) or a limit order (setting a maximum buying price), particularly useful if the spread looks wide or the price appears volatile.
- Confirm the platform's applicable share-dealing charge, which may differ from its charge for buying open-ended funds.
- Be aware that, unlike a daily-dealt fund, the price at which an order executes can move during the trading day, particularly for less liquid, smaller trusts.
Where the discount and premium fit into the wider picture
A trust's discount or premium is influenced by a range of factors, including overall investor sentiment towards its asset class or investment strategy, the trust's own historical discount pattern, dividend policy, and the effectiveness of any board-authorised share buyback or issuance programme aimed at managing it, as discussed in more detail elsewhere in this guide. Some investors specifically look for trusts trading at what they consider an unusually wide discount relative to their own history, on the view that a narrowing discount could add to returns if it occurs, while others place more weight on the trust's underlying portfolio and management quality. Neither approach is inherently correct, and discount movements are not guaranteed or predictable in either direction.
Holding investment trusts within UK tax wrappers
Investment trusts can generally be held within a Stocks and Shares ISA or a SIPP in the same way as ordinary listed shares and ETFs, sheltering dividends and gains from UK tax within the £20,000 combined annual ISA allowance or the £60,000 pension annual allowance (or 100% of earnings if lower) applicable for the 2025/26 tax year. Held outside a wrapper, dividends from investment trusts are treated as dividend income, potentially taxable above the £500 annual dividend allowance for 2025/26, and gains on disposal fall under capital gains tax rules, including the £3,000 annual exempt amount and rates of 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers on gains above that amount. One point specific to investment trusts is that, unlike most open-ended funds, they are permitted to retain up to 15% of their income each year rather than distributing it all, building up a revenue reserve that can be used to help maintain dividend payments during periods when underlying portfolio income is lower — a mechanism not available to open-ended funds in the same way, and one some income-focused investors consider when comparing trusts against open-ended alternatives. As ever, current HMRC allowances and rates should be checked, since they are reviewed periodically and can change.
Key takeaways
- Investment trusts are listed companies whose shares trade on the stock exchange, unlike open-ended funds, which create and cancel units directly with the fund manager.
- Buying and selling investment trusts requires a stockbroking-style dealing facility, with live pricing, bid-offer spreads, and order types similar to ordinary shares and ETFs.
- Investment trust shares can trade at a discount or premium to their underlying net asset value, adding a dimension to returns not present in open-ended funds.
- Dealing charges and settlement conventions for investment trusts typically follow a platform's share-dealing structure rather than its fund-dealing structure.
- Using limit orders and checking the current discount or premium before dealing are practical steps worth taking, particularly for smaller or less liquid trusts.
- Discount and premium movements can affect returns independently of the trust's underlying portfolio performance, in either direction.