How to buy a stocks and shares ISA

Each UK resident has an ISA allowance that allows a certain amount of savings to be invested tax free each year.

There is no tax to pay on interest paid from or capital gains realised from investments held within an ISA. With the increasing taxation levels this is a valuable allowance from the government, so don't let it go to waste!

The stocks and shares element of an Individual Savings Accounts (ISA) can be used to save a maximum of £10,200 per financial year, or £5,100 per financial year (from 1 April to the 31 March of the following year) if a cash ISA is opened in the same tax year.

Over time, investments in stocks and shares generally outperform other investments such as cash or property. As a result the stocks and shares element of an ISA are popular for long term investments.

Unfortunately there are no particular tax benefits to investing in stocks and shares ISAs for basic rate taxpayers. There is, however, the advantage that there would be no Capital Gains Tax to pay on any profits made by the ISA, so this is appealing for those of us who like to trade shares and get lucky.

• Unlike cash investments such as Cash ISAs, the value of the investment can fluctuate and there is no guarantee that the investment capital is safe.
• Stocks and shares ISAs or the funds/stocks bought through them usually have an annual management charge.
• Charges are often lower if you buy the ISA through a discount broker or an independent financial advisor such as Hargreaves Lansdown or selftrade rather than from the company running the fund in which the ISA is invested. Often a discount broker will refund the initial charge for investing in the fund (which could be as high as 5%), and some brokers will refund some of the annual management charge for holding the fund (this is often termed a loyalty bonus).
• Your own bank may have high charges and only a limited range of investment options.

Charges usually have two components:

• An up front charge for starting up the ISA.
• An annual management charge.

Due to the volatility in stock markets, it is often better to drip-feed money into the stocks and shares ISA on a monthly basis over the financial year rather than investing the entire £4,000 at once. A number of ISA providers allow for investments to be made by direct debit, and it is usually possible to select which unit trusts the monthly income should be invested in.

There are a large number of investments that can be held in a stocks and shares ISA. Unit trusts are most popular, but Exchange Traded Funds (ETFs) are growing in popularity. These are also numerous, and it is possible to invest in different regions of the world as well as different business themes, such as investing in agriculture, emerging markets like Russia, commercial property or even in precious metals such as gold and silver or commodities such as natural gas.

Tracker funds which invest in the shares within a specific stock index such as the FTSE 100 or FTSE 250 are also popular. These tend to have much lower charges than actively managed funds. Fund managers such as HSBC offer tracker funds with very low charges (typically less than 0.5%). Equity income funds are also popular within ISAs, as the dividends paid out from these funds is tax free.

If you want to trade stocks and shares in your ISA, then check out the range of beginners guides for trading the financial markets.

All information on this hub is provided for information only and should not be used as a basis for financial planning. Information was assumed to be correct at time of publication. The information does not constitute regulated financial advice. Before investing you are advised to seek independent advice, such as by consulting an independent financial adviser.