How to open a Stocks & Shares ISA
What is a Stocks & Shares ISA?
ISAs (Individual Savings Account, if you want to spell out their whole name) are a tax-free wrapper for your savings or investments, where you can tuck away up to £20,000 every year without paying a single penny of tax!
You've got a variety of options when deciding what to put in them. Most people plump for a Cash ISA - which pretty much does what it says on the tin - but a Stocks & Shares ISA can be a better alternative for longer-term saving and investing.
With a Stocks & Shares ISA, you can invest in companies and funds on the stock market, with the aim of those investments going up in value. It can be especially appealing when inflation is high and cash is falling in purchasing power.
That being said, investing may carry higher risk than keeping your money in cash as the value of your investments can bounce around. But your money may also grow faster and, more importantly, beat inflation.
You can read more about how Stocks & Shares ISAs work, how much you can put in them, and their tax benefits in our full guide below.
Why do you need a Stocks & Shares ISA?
Cash has its selling points. Unless something drastic happens, you'll usually get out around the same amount as you put in. However, this isn’t necessarily as safe as it sounds, particularly for long-term savings.
If you’re only getting 0.5% interest on your savings and inflation is running at 9% (as it is today), in real terms you’re losing 8.5% of your money per year. This can build up over time, to the extent that a £10,000 pot invested in 2001 would now be worth just £5,800 in real terms. Almost half the value of what it used to be!
Stocks & Shares ISAs, in contrast, have a better track record of outpacing inflation. Data from IG Index shows that between 1984 and 2019, the FTSE 100 rose by 654% in price, and 1,377% on a total return basis. This averages out at a total return of 7.8% per year (including dividends). And if anything, the FTSE 100 has been lacklustre – global peers such as the S&P 500 have delivered far stronger performance.
Now, investors shouldn’t take past performance as a cast iron guarantee of future riches. However, you can mitigate the risks of stock market investment through regular savings and by being careful where you invest (no speculative technology - hello crypto - or ‘dead cert’ mining companies).
If you're curious about where to find the best Stocks & Shares ISA, make sure you check out our ISA compare tables to see what we - and our readers - think are the best providers on the market! Click the link below to dive in.
How to open a Stocks & Shares ISA?
The easiest way to open a Stocks and Shares ISA is via an online investment platform, such as Hargreaves Lansdown, Fidelity or Interactive Investor to name a few. These are essentially websites and/or apps that operate a bit like an internet banking account, allowing you to open a Stocks & Shares ISA and manage the investments in it.
Perhaps more importantly, they have plenty of tools to help you get started! These will ask you about your tolerance for risk – which is basically how much you can stomach the idea of the value of your savings jumping about – and how long you have to invest. From there, they’ll give you a recommended list of funds that suit your needs. Funds are a good place to start with investing - you can think of them like a shopping basket filled with dozens of individual shares.
But before you start opening your ISA and buying investments, shop around and make sure the provider or platform that you're using is right for you. There are lots of things to consider - from fees to customer service to ease of use - and you should take your time before making a decision.
Check out our ISA compare tables to browse what's out there on the market and decide which provider to go for!
What are the downsides of Stocks & Shares ISAs?
There’s no getting away from it - you can lose money in a stock market investment. In March 2020, at the height of the Covid-19 pandemic, markets dropped 30% almost overnight. That hurt. However, you need to remember that markets had mostly recovered by September of that same year. So if you can sit tight during the ups and downs and hold your nerve, you'll probably be alright.
Another risk is that you could pick a rubbish investment - this is a peril even for the most experienced investors. It's why opting for ready-made portfolios can be useful. You probably won’t get the best, but you’ll also probably avoid the worst. The key is not to put everything on red. Have a range of investments and then, if one isn’t great, it doesn’t matter too much - your money is spread across other investments which might have performed better. Most multi-asset funds will do this hard work for you.
How much does a Stocks & Shares ISA cost?
You can usually expect to pay somewhere between 0.25% and 0.5% in admin fees, plus the cost of the underlying investments (usually another 0.5% to 0.75% on top). Some platforms will charge a fixed fee per month, and this can be an easier way to keep track of costs. Check out the fees and charging structures at some of the biggest platforms on our ISA compare table below.
