Different types of investment companies, shares and securities
Different types of investment company
Investment trusts are the most common type of investment company. Investment trusts are investment companies which are based in the UK and which meet certain conditions such as paying out a certain amount of the income they receive from their investments.
Non-UK investment companies are very similar to investment trusts, but they are based in areas other than the UK. Many non-UK investment companies are based in the Channel Islands, for example. Because they aren’t based in the UK, investors don’t have to pay stamp duty when they buy non-UK investment company shares.
Many investment companies that invest in property are structured as Real Estate Investment Trusts (REITs). REITs have similar, but different rules to investment trusts. They are companies that:
- Own commercial or residential property and rent it out.
- Have to distribute 90% of the profits they make from their rental business to the REIT’s shareholders.
- Do not have to pay corporation tax on profits from the rental business.
Shareholders in REITs pay income tax, as opposed to dividend tax, on the distributions that are made to them in this way. The general idea is that they are taxed as though they owned the properties themselves. Of course, if REIT shares are held in an account such as an ISA or a SIPP, no tax is paid on the distributions, making REITs a tax-efficient way to invest in property.
Venture Capital Trusts (VCTs) invest in some of the most dynamic small businesses in the UK to help them grow. Because of the economic growth these businesses can create, the government offers generous tax benefits when you invest in VCTs.
To find out more about VCTs, visit the VCT section of the guide.
Different types of shares and securities
There are different types of investment company shares which investors can buy. Most are ‘ordinary’ shares but there a couple of other options. However, different types of shares are specialist investments and investors should do thorough research before investing in them.
Zero Dividend Preference share (zeros or ZDPs)
A type of share which aims to deliver a fixed amount of capital growth over a set period of time. This amount isn’t guaranteed.
ZDPs don’t pay any income.
This type of financial instrument has a limited life and can be converted into new ordinary shares in the company at some time in the future at a fixed price known as the strike price.
Warrants have similar characteristics to subscription shares. They don’t have the same rights as ordinary shares (e.g. they are not entitled to any dividends before they are converted into the ordinary shares). They are also much higher risk than ordinary shares, because if the share price of the ordinary shares is lower than the warrants’ strike price, the warrants will have limited value. So it’s possible for warrants to expire worthless and you could lose all the money you paid for them.
Convertibles are shares or securities which can be converted into ordinary shares at some time in the future.
C (‘Conversion’) shares help an investment company grow in a way that protects the interests of existing ordinary shareholders.
When an investment company wants to grow, it may issue C shares. These shares and the proceeds are held in a separate pool and invested in a portfolio of assets.
After a certain period, or when the pool of new money is fully invested, the two portfolios are merged and the C shares are exchanged for ordinary shares.
The advantage of C shares is that existing ordinary shareholders:
- Don’t have to take up the C share offer if they don’t want to.
- Don’t have their returns affected while they wait for the proceeds of the C share to be invested.
- Don’t bear any of the issue costs.