What is a Stocks and Shares ISA?
Money put into Stocks and Shares ISAs is invested – which is why they're also known as investment ISAs. They're a useful way for first-timers to get involved in the stock market, and also make the most of their tax-free annual ISA allowance. But what are they?
There are various kinds of ISAs which can hold your savings or investments in a tax-free "wrapper." They include Property ISAs, Lifetime ISAs, Fund Supermarket ISAs and Ethical ISAs. A Stocks and Shares ISA is another ISA option - but one which offers better rates of return than the low rates available on Cash ISA deposits. .
“Stocks” and “shares” are generally interchangeable terms, though they have slightly different meanings:
- “shares” can refer to owning part of one particular company (“I own shares in Unilever”)
- “stocks” can refer to shares in a number of different companies (“I own stocks in the renewable energy industry”)
Where do I get Stocks and Shares ISAs from?
The structure for Individual Savings Accounts (ISAs) was set up by the UK government as a way of encouraging savings and investments, by allowing British taxpayers to earn up to a specified amount from them each year, tax-free.
The ISAs themselves are offered by a wide number of banks and financial services companies. You can open Stocks and Shares ISAs with:
- Online “fund supermarkets” (select and manage your funds yourself)
- “Robo-advisers” (an online investment service uses algorithms to manage a portfolio)
- Wealth managers
What KINDS of Stocks and Shares ISAs are there?
A Stocks and Shares ISA lets you invest in:
- Shares in companies (you directly own a share of the company and its profits – or losses)
- Funds (your money is pooled with other investors’ money in a fund which then invests it in a variety of places: you own “units” of the fund)
- Investment trusts (you buy shares in a company which has a fixed number of shares; the company does the investing)
- Bonds traded on the bond market: either government bonds also known as “gilts” (you own part of a government’s borrowing on the financial market), or corporate bonds (you own part of a company’s borrowing)
You can also hold cash in your Stocks & Shares ISA.
How can I make money with Stocks and Shares ISAs?
Savings and investments in ISAs are covered by the government’s Financial Services Compensation Scheme (FSCS). The government will compensate you for up to £50,000 if the company you invest with goes under.
But you’re not protected for an investment that just performs badly.
The stock market can go down as well as up.
Everyone will advise you that you should invest in Stocks and Shares ISAs for at least five years, to allow for the normal fluctuations of the stock market.
But you will also need to be prepared to move your investment elsewhere if your ISA is performing consistently under-performing.
Read more on the best Investment ISAs, to find the best rate for you.