Stocks and shares Isas explained 10 steps to finding the best stocks and shares Isa
Stocks and shares Isas can make a lot of sense if you're considering your first foray into the markets.
But a stocks and shares Isa isn't an investment itself - it's a type of account in which you can can buy almost any combination of investments for tax-efficient returns.
Our two minute-video explains how to find the best stocks and shares Isa for you.
Find out more: Stocks and shares Isa providers reviewed - find a provider that suits your needs with the full range of Which? fund supermarket reviews
Finding the best stocks and shares Isa - 10 steps
Here, we give you ten points to consider when deciding where and how to invest your stocks and shares Isa allowance.
Find out more: Are you ready to invest? It only makes sense to consider investing if you are debt-free, with appropriate insurance policies and plenty of cash savings. If you're unsure, read our guide before going any further.
Step 1 - advice or DIY?
Good financial advice could be the best investment you ever make and, for many investors, there's no substitute for professional help. A financial adviser will assess your personal circumstances and attitude to risk before making recommendations.
But, increasingly, investors are going it alone and investing in stocks and shares Isas without advice. For the purposes of this guide, we'll assume that you are interested in making your own decisions, without financial advice.
Find out more: Financial advice - the five-page Which? guide
Step 2 - know the rules
Your Isa allowance for the 2016/17 tax year is £15,240 (increasing to £20,000 in 2017/18). Remember that any contributions you make to a cash Isa also come out of your allowance. So, if you subscribe £5,000 to a cash Isa with a bank or building society, you will only be able to subscribe £10,240 to your stocks and shares Isa in the 2015/16 tax year.
It's also important to remember that you can only have one cash Isa provider and one stocks and shares Isa provider in each tax year - if you want to change provider and then make additional contributions, you will need to transfer your Isa first.
Find out more: How to find the best cash Isa - the Which? guide
Step 3 - get to grips with investment risk
Investing isn't for everyone and, before you commit to a stocks and shares Isa, it's crucial that you have an understanding of all the risks involved.
Your attitude to risk will determine how you approach most other questions you'll face when negotiating your options.
Find out more: Understanding investment risk - start with the Which? guide
Step 4 - find a provider that suits your needs
With cash savings, chances are you'll end up with a familiar banking name, or a building society with a long history. With a stocks and shares Isa, conversely, you could easily end up with a provider you've never heard of before.
Some big banking brands, including Barclays and HSBC, do offer stocks and shares Isas, although investment options are sometimes more limited. And as our reviews show, the banks tend to rank poorly for customer satisfaction when rated by Which? members.
Premium fund supermarkets
The biggest players in the stocks and shares Isa market are Hargreaves Lansdown, a FTSE 100 company based in Bristol, and Fidelity Personal Investing, the UK arm of global investment heavyweight, Fidelity.
These providers are known as fund supermarkets because originally their services allowed investors to choose from a wide range of different investment funds, from different investment management companies such as Invesco Perpetual, M&G and Jupiter, and hold them all together in one account, with one provider. Now, fund supermarkets offer other types of investment as well, including shares, investment trusts and corporate bonds.
Hargreaves Lansdown and Fidelity, along with other premium providers such as Alliance Trust Savings and Bestinvest, offer plenty of bells and whistles for stocks and shares Isa investors to make use of, including research to help with your investment decisions and online tools to analyse your Isa portfolio.
But you get what you pay for - premium providers can cost significantly more than cheaper alternatives, especially as your portfolio grows in value.
Budget fund supermarkets
For stocks and shares Isa investors looking for the keenest deal, Charles Stanley Direct and AJ Bell Youinvest, offer lower charges than the premium providers, although you won't necessarily have as many resources at your disposal. Nevertheless, these providers are highly rated by Which? members.
The stocks and shares Isa scene also includes a number of providers from a stockbroking tradition, with Interactive Investor, TD Direct Investing and The Share Centre offering plenty of resources for budding stock pickers. As with fund supermarkets, these brokers will charge you stockbroking commission to buy and sell shares, with additional account-service fees usually added on top.
Step 5 - decide how you want to invest
There are two ways you can go about investing your stocks and shares Isa allowance, which for the 2016/17 tax year is £15,240. You can invest with lump-sum contributions, or you can drip feed your money into the markets on a regular basis.
Investing your full contribution in one go will get your money working for you, with any returns compounding from the start. If you're investing for the long term, meaning at least five, but ideally 10 years or more, timing the market should not be an overriding concern. It's time in the market that matters.
You can invest regularly in one of two ways within a stocks and shares Isa. You could drip feed your allowance in over time, making ad-hoc contributions. Those who adopt this approach often attempt to make their contributions when the market dips - but this is notoriously difficult to get right.
Alternatively, most stocks and shares Isa providers will allow you to set up a monthly direct debit, making monthly contributions of as little as £50. One possible advantage of using this approach is that you can adopt a strategy known as 'pound cost averaging' - the theory here is that, as markets will invariably fluctuate over time, some of your monthly investments will take advantage of lower asset prices. The effect is that you will smooth out market volatility.
Find out more: Pound cost averaging - our guide covers the popular regular savings strategy
Step 6 - asset allocation
Investing in a diverse portfolio is key to managing the risks you take in your stocks and shares Isa.
Different assets, such as equities (shares), corporate bonds and gilts, and commercial property, move in value at different times and for different reasons, so the theory is that if you achieve a balance portfolio, you will have a degree of protection against falls in any one area of your portfolio.
Find out more: The Which? portfolios - our asset allocation tool can help you find the right mix of assets for you
Step 7 - active or passive funds?
Investment funds such as unit trusts and open-ended investment companies (Oeics) offer the opportunity to invest your stocks and shares Isa contributions in diverse portfolios of shares or bonds through a single investment. Funds differ in terms of where they invest, with some defining their portfolios by a particular geographical region, or by a particular type of company or sector.
But they also differ in another way - some fund managers actively pick shares or bonds according to their strategy in an attempt to beat the market, while other funds invest passively, meaning they aim to track a particular stock market index such as the FTSE All Share, which includes all of the companies listed on the main London stock exchange.
The trouble with active fund managers is that few manage to successfully beat the market on a consistent basis. And because they take higher charges out of their funds - typically 0.85% a year - it's likely that many fund managers will disappoint in the future. As an investor, it is impossible to pick a winner with any degree of certainty.
Those active stock pickers who do deliver market-beating returns consistently - such as Warren Buffett in the US, and Anthony Bolton and Neil Woodford in the UK, are celebrated by investors, but their fame and popularity only goes to highlight how unusual their records are.
If you can't easily beat the market, why not join it? That's the argument made by advocates of passive, or 'index', funds. The great advantage of index funds is that they come with much lower charges than active funds - as costs are the only thing you can control with any certainty as an investor, this argument is a compelling one.
Index funds, provided by the likes of Vanguard, Fidelity and Legal & General, can come with ongoing charges as low as 0.1%.
Find out more: Active and passive investment - the Which? guide
Step 8 - don't forget investment trusts
One option often overlooked by fund investors is the investment trust. These invest in a range of companies, such as unit trusts and Oeics, but they trade on the stock exchange as companies in their own right.
Many investment trusts have historically performed better than similar actively managed unit trusts and Oeics, in part because of lower charges, but also because it's possible for them to borrow money in order to boost investments and, when it works, returns. This tactic, known as 'gearing', comes with greater risk. This outperformance has narrowed recently however – and of course, past performance is no indicator of future returns!
Find out more: What are investment trusts? - the Which? guide
Step 9 - review but don't tinker
Once you've set up your stocks and shares Isa, it can be tempting to log in and view it in your online account on a regular basis. The danger with doing this is that you will be drawn into tinkering with your portfolio.
If your original portfolio is set up on a sound basis, you should aim to leave it for the long term, with annual reviews the sensible way to reassess and make sure your investments haven't strayed too far from your desired asset allocation, rebalancing if necessary. This is what a financial adviser would do for you, after all.
If you deal too often, you risk ending up with a list of random investments rather than a carefully considered portfolio.
Find out more: Managing your portfolio - is it time to rebalance?
Step 10 - consolidate
Having different stocks and shares Isas from different tax years, held through different providers, can make managing your Isa investments unwieldy.
If you decide that one provider suits your needs, you can transfer previous years' investments into the one account - making it easier to monitor and administer your investments.
Find out more: Step by step guide to stocks and shares Isa transfers - our six-point guide
- The beginner's guide to investment - go back to the basics
- Tax on savings and investments - our top tips on tax
- The Which? Money helpline - talk to our experts
Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.