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What It Is:

A real estate investment trust (REIT) is a closed-end investment company that owns assets related to real estate such as buildings, land and real estate securities. 

REITs sell on the major stock market exchanges just like common stock.

How It Works/Example:

REITs raise money from a collection of investors and provide them with access to real estate.  Publically traded REITs raise money for their portfolios by selling shares on an exchange.  Private REITs must find individual investors.

REITs are legally required to distribute at least 90 percent of their taxable income to investors.  Income comes from the rent, managing fees and leasing of the properties. 

Mortgage REITs, which invest primarily in mortgages and other debt products related to real estate, receive income from the payments borrowers make toward the mortgages the REIT owns. Mortgage REITs are more akin to a bond investment rather than a straight real estate investment.

Why It Matters:

REITs are a powerful way for individuals to invest in real estate.  As compared to privately owning a building, shares of REITs are more liquid (since they can be bought and sold freely on an open market) while still offering the relatively predictable revenue stream one comes to expect when collecting rent from a tenant.

Because of the high amount of income the REIT must distribute, REITs are associated with high dividend yields.  They also have tangible assets (land, buildings, etc.) which makes them a relatively stable, low-volatility, equity.  Because of this, they often grow more slowly than the S&P and DJIA.