Are you looking for a tax-efficient way to invest, rather than save? While a cash ISA pays interest on money held in an account, a shares and stocks ISA allows you to hold a range of investments, with any growth of income, free from tax.
The investments you choose can have a major impact on risk and returns. Understanding what’s eligible to hold and how different types work together can help you make more confident decisions.
Exploring investment options
The precise choice depends on your provider, but these are your main options.
Shares and Stocks
You can buy shares in individual companies, including fractional shares offered by some providers. When you invest, you become a part-owner of the business and may benefit if its share price rises or it pays dividends.
Individual shares give you more control over where your money goes, but they also concentrate risk. You might therefore examine a company’s finances, business model, prospects and valuation before buying, not just its price movements.
Funds and exchange-traded funds
Funds pool your money with other investors, and a manager then invests it across a collection of assets. Actively managed funds aim to outperform a particular market, while index funds track a market index.
Exchange-traded funds (ETFs) work in a similar way but trade on a stock exchange throughout the day. A single global equity ETF might bring exposure to companies across several countries and industries, making it a practical path to diversification without having to choose every investment yourself.
Bonds
Bonds are also eligible to hold in a stocks and shares account, allowing you to lend to a government or company. In return, the issuer normally pays interest and repays the original amount on a specified date.
They often experience smaller price movements than shares, but they’re still exposed to risks like inflation, interest-rate changes and the issuer failing to repay its debt.
Why diversification matters
Diversification spreads your money so that one holding has less influence over your overall results. For example, a portfolio consisting entirely of UK banking shares could suffer heavily if that industry hit difficulties.
A diversified fund may handle much of this work for you, though diversification cannot stop all losses.
Choosing investments that suit your goals
Your investment choices should reflect when you expect to use the money, how much uncertainty you can tolerate and how strongly you could withstand a loss. Funds for a near-term expense may sit more comfortably in cash, while a longer timeframe allows investments more opportunity to recover from market falls.
If you feel unsure about suitability, consider speaking to a regulated financial adviser before you invest. By taking a long-term view and reviewing investments regularly, you can make full use of the ISA’s tax advantages while keeping your strategy aligned with what you want your money to achieve.
