What is a Stocks & Shares ISA?

Written by
Katie Clarke
Time to read
4 minutes, 27 seconds

What is a Stocks & Shares ISA? Here we will be explaining exactly what a Stocks & Shares ISA is and how easy it is to invest using one.

To start with the basics, ISA stands for ‘individual savings account’, and currently you can invest up to £20,000 per tax year without paying income tax or capital gains tax on any growth.

You can only open and subscribe to one Stocks & Shares ISA in a tax year, and the £20,000 allowance is shared between all the other ISA types you pay into.

Stocks & Shares ISA vs Cash ISA

When it comes to asking, ‘What is a Stocks & Shares ISA?’ it’s a good idea to familiarise yourself with what ISAs are available to you. The two most known types of ISAs are a Cash ISA and a Stocks & Shares ISA. To offer a comparison, Cash ISAs grow in relation to interest rates, whereas Stocks & Shares ISAs grow in relation to the funds they are invested in.

Stocks & Shares ISAs can offer the potential of a higher return rate than Cash ISAs over the long-term. To put this into context, if you saved £1,000 in a Cash ISA which has an interest rate of 1%, per year, after 5 years you would have £1,051. However, if UK inflation was 2%, your £1,051 would only have the same buying power as £950 in todays terms. In short, the value of your savings could shrink over time if interest rates cannot keep up with the higher inflation rate.

In order to reach certain financial goals, you may want to consider products that have more potential of outperforming inflation year on year. This is where the Stocks & Shares ISA comes in, as the returns you receive are directly linked to the performance of the assets held within the funds you are invested in.

Investment risk

 Funds vary on the amount of risk they hold depending on the assets they’re invested in. The lower risk funds have lower potential returns when compared to higher risk funds. It’s important to remember that when investing, your capital is at risk of decreasing, as well as increasing therefore choosing a level of risk you’re comfortable with is imperative when it comes to investing.

One approach is investing in a diversified Portfolio over a long period of time. Investing for a minimum of five years can help to level out any market volatility. As the saying goes – it’s not about timing the market, its time in the market that counts.

Key considerations

When looking for the right provider for your Stocks & Shares ISA, here are a few things you should consider:

  • Level of risk
    Choosing a level of risk that you are comfortable with can help you achieve your financial goals when it comes to investing. True Potential offer portfolios across five different risk levels.
  • Time invested
    If your goals are long term (five or more years), then a Stocks & Shares ISA may suit your needs, as time generally allows your money to grow while riding out volatility in the markets. Additionally, more time in the market leads to other benefits such as compound growth, this is when the returns your investments make is reinvested, earning you more growth.
  • A globally diversified portfolio
    Diversification can help to maximise returns and minimise risk. If you are invested in a Portfolio which is spread across multiple assets, locations, managers and investment styles, you may shield yourself from sudden market dips. For example, if commodity markets are down, but the European markets are up, then your investments may remain stable as the peaks and troughs balance each other out.
  • Investment professionals
    Leaving the decision making to professionals when it comes to fund allocation, assets and manager style is often the wisest decision. Investment professionals have the experience and knowledge to navigate the markets and make the decisions which will benefit your investments.

To conclude, when you’re trying to understand what a Stocks & Shares ISA is, here are the basics:

  • You can invest up to £20,000 in one tax year either as a lump sum or through smaller more frequent investments using a direct debit.
  • You won’t have to pay any tax on growth within your Stocks & Shares ISA
  • Investing in a diversified portfolio rather than a singular company or stock can help mitigate the effects of volatile markets.
  • Stocks & Shares ISAs are more suitable when being used for long term goals

If you would like to find out more about how a Stocks & Shares ISA could help you achieve your financial goals, speak to a financial adviser or click here for more information.

True Potential Wealth Management offers restricted financial advice. Our service is specifically designed for clients wishing to access their financial affairs online. With investing your capital is at risk. Investments can fluctuate in value and you could get back less than you invest. Tax rules can change at any time. Please be aware that this communication should not be considered as financial advice.

True Potential Wealth Management LLP is authorised and regulated by the Financial Conduct Authority.  FNR Number 529810.  Registered Head Office: Newburn House, Gateway West, Newburn Riverside, Newcastle upon Tyne, NE15 8NX. True Potential Wealth Management is a Limited Liability Partnership. OC356611.

 

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