Bid and Offer Pricing

Can you let me know what aspect of the two examples you are having trouble with? I don't want to regurgitate the examples if there is only a part of the explanation that you are not happy with.

 

If the unit trust managers sell me 1000 units at 5.00 each, and then give me 4.90 for each unit when I sell the units, they will make a profit out of the transaction. This profit is designed to cover the costs of putting me on their systems, sending me the necessary documentation, paying commission to any IFA that advised me, etc. In general, most unit trusts would operate most of the time on an "offer pricing basis". This means that any new investment is used (after the costs mentioned above) to buy new assets in the trust portfolio, and to create new units in the trust. So if I invested £1m in the trust, and the offer/bid on the offer pricing basis was 5.00 / 4.90, they would create 200,000 new units in the trust for me. My £1m after the costs mentioned above would be invested in new assets in the portfolio and the unit trust would expand. If I sell my units back to the company, they would give me 4.90 for each, and they would hold on to the units until another buyer comes along. My units would be recycles to the next buyer (who buys them at £5 each). So long as the trust is expanding, this works well. If the trust starts to contract and there are consistently more sellers than buyers, the manager cannot recycle the units. They switch to a "bid pricing basis" which produces an offer/bid price based on the price that they can give to all the sellers of units while the trust is contracting. This might be 4.90 / 4.80. Anyone selling units now gets only 4.80, but their sold units are liquidated and the assets of the trust are liquidated. Assets within the trust are sold to pay for the money that is given to unit sellers. I hope this helps.