OpenMarkets Education

Listed investment companies (LICs)

An LIC is a listed, collective investment vehicle that provides investors with a diversified exposure to one or more asset classes. These might include Australian and global shares, property, fixed income and cash, and more recently, alternative investments. Investors buy and sell shares in an LIC in the same way they would in other listed securities.

LICs?are incorporated as companies and are closed-end funds. They?issue a fixed number of shares through an initial public offering?(IPO) and?investors then buy and sell those?shares on an exchange. As a company, LICs generally pay fully franked dividends. These are sourced from the underlying investment portfolio and from company tax paid on its own profit.

The value of the underlying assets of an LIC is measured by its net tangible assets?(NTA) [link to glossary]; each LIC should trade close to the value of its NTA, minus ongoing fees. However, many LICs trade at a premium (share price is above its NTA) or at a discount (share price is below the NTA).

While the NTA should be close to the value of the underlying investments, other factors can impact an LIC?s price, such as:

Investor sentiment
> Portfolio performance
> Fees
> Market capitalisation
> Liquidity.

As with any investment structure, there are both positive and negative aspects of investing in LICs.

Income from franked dividends and underlying investmentsSome LICs are thinly traded and may be hard to sell when required
Ability to buy at a discount to NTAMay need to sell at a discount to NTA
Access to a diversified portfolioLICs are prone to general volatility of the sharemarket
Professional portfolio managementMarket price of LICs can be impacted by investor sentiment, independent of the NTA
Transparency as LICs must comply with ASX corporate governance and reporting requirements

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