Unlike open-ended funds, investment companies do not create or cancel shares when investors want to buy or sell. Instead, their shares are traded on the stock market (usually, the London Stock Exchange).
This has several consequences for investors:
- Shares do not normally trade at the net asset value, but at a premium or discount to it depending on market sentiment
- Shares trade every second the market is open, rather than just once a day
- You know exactly what price you will pay/receive before you trade
- The market remains open even in stressed conditions; there is no risk of an asset manager suspending trading as there can be with open-ended funds
- There is a bid/offer spread; the larger and more liquid the investment company, the tighter the spread is likely to be
- You will usually pay dealing commission to your platform or broker when you buy or sell
- Stamp duty of 0.5% is charged on UK share purchases, and a Panel on Takeovers and Mergers (PTM) levy of £1 on transactions of more than £10,000
The largest investment companies are FTSE 250 constituents. They typically see more than £1 million of shares traded a day, and are likely to offer sufficient liquidity for almost all advised clients.
The smallest investment companies, on the other hand, are much less liquid, and may see average trading volumes of less than £100,000.
Those investors who require a very high level of liquidity, for example wealth managers running large model portfolios, may choose to restrict their buylists to larger investment companies. For example, they may choose to avoid investment companies with a market capitalisation of less than £200 million.
The typical advised client is unlikely to require the same levels of liquidity as a large wealth manager. However, if a client builds up a large position in a small investment company and needs to sell that position, it may be advisable to do this over a period of several days rather than in a single trade. It is also a good idea to bear in mind that larger investment companies are cheaper to deal in, having narrower bid/offer spreads.