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What is a stocks & shares ISA?

A stocks & shares ISA – also known as an investment ISA –  is a tax-efficient investment account. This means you don’t have to pay income tax or capital gains tax on money you earn from your investments made through the ISA, up to a certain limit. 

ISA stands for Individual Savings Account. A stocks & shares ISA allows you to invest in a wide range of shares, funds, investment trusts and bonds. It’s important to understand that the value of investments can fall as well as rise and you may not get back what you invest.

We explain how a stocks & shares ISA works and what to consider – to help you decide if it’s a good time for you to invest.

How does a stocks & shares ISA work? 

You don’t need to be on Wall Street to invest your money. You can start investing from your kitchen while having a cup of tea. 

To be eligible for a stocks & shares ISA, you must be:

  • aged 18 or over
  • a UK resident for tax purposes

Before you invest your money, it's important to invest some time into learning the basics and understanding the risks. You might want to consider getting personalised investment advice

A stocks & shares ISA should be seen as a medium to long-term commitment, meaning you should be prepared to invest for at least 5 years. The value of any investment can fall, as well as rise, so there's always a risk that you may get back less than what you invest.

What can you invest in?

If you decide to invest, you can either: 

  • choose to invest in funds
  • research and buy your own shares

Invest in funds

An easy way to start investing is to buy units in ready-made baskets of investments. Funds allow you to spread your money – and risk – across different investments including shares, trusts and bonds. You can either research and buy your own funds, or choose a ready-made portfolio.

Research and buy your own shares

If you’re keen to take an active interest in investing, you might prefer to research and buy your own shares. When you buy a share, you're buying a small stake in a company. It can feel good to watch a business you believe in do well – but remember that companies can also do badly and the value of your investment could fall, as well as rise.

Explore more: A beginners guide to investing

How much can you pay into an ISA?

The total amount you can save in ISAs in the 2020-21 tax year is £20,000. This is known as your annual ISA allowance. This limit is set by the government and can change from one financial year to another.

You can invest it all in a stocks & shares ISA, or spread it across other types of ISA, such as a cash ISA, innovative finance ISA or, if eligible, a lifetime ISA. But you can only have one ISA of each type and you must stay within the total limit of £20,000. 

If you go over this limit, you may end up paying tax on your investment. 

The tax year runs from 6 April to 5 April. The HMRC deadline to put money in an ISA and take advantage of your allowance for each tax year is midnight on 5 April. However, it's worth checking with your provider as they may have an earlier deadline. 

Keep in mind, the value of tax benefits will depend on your individual circumstances and these rules may be subject to change in the future.

What happens to any income from a stocks & shares ISA?

Any income made on investments in a stocks & shares ISA can either be withdrawn, reinvested back into the investment it has come from, or held as cash in your account. Some investment types, such as certain funds, may only allow you to reinvest your income.

How much does it cost to invest in a stocks & shares ISA?

If you’re thinking about investing in a stocks & shares ISA, there are fees and charges to consider. These include:

  • Account fee / platform fee

You may be charged for using a single online account – also known as an investment platform – that holds your investments together in one place. This can be a flat fee, or a percentage of the value of your investments you have in the account. 

  • Fund management charge

When you invest in funds, the fund managers will charge you for actively looking after your investments – also known as an annual management fee.  

  • Buying and selling charges

With sharedealing, it’s common to pay either a percentage, or a flat fee, every time you buy and sell shares on a platform – also known as a trading fee. 

  • Transfer out fee

Some providers charge a fee if you move your stocks & shares ISA to another provider. 

Are you ready to invest?

Now might be the ideal time to invest for some people, but not for others. This will depend on your individual circumstances. 

Before you start investing, it’s recommended that you:

  • pay off any high-interest debt you may have
  • have a rainy day fund set aside for emergencies – 3 to 6 months’ worth of expenses to pay for things without needing to dip into your investments
  • can afford to invest your money for at least 5 years 

 

As a general rule of thumb, you should never invest more money than you can afford to lose. 

But you don’t need a lot to get started. For example, with HSBC – you can start investing with a lump sum of £100. With all our investing options, fees and eligibility criteria apply and you may not get back what you invest.

Explore more: Is now a good time to invest?

Can you access your money if you need to?

Although a stocks & shares ISA should be seen as a medium to long-term investment – things can, and do, happen out of the blue – and you may want to withdraw money from your ISA. You can do this at any time. 

For example, with any HSBC investment, you can access your money if you need to – usually within 2 to 3 days of selling your investments – with no exit fees. 

Explore more: Find out how you can invest via a stocks & shares ISA with HSBC

Key takeaways

  1. A stocks & shares ISA gives you the potential to earn more on your savings than a cash ISA, but the value of investments can go down as well as up and you could get back less than you invest.
  2. A stocks & shares ISA should be seen as medium to long-term investment – which means you should be prepared to invest for at least 5 years.
  3. Before you open a stocks & shares ISA, it’s a good idea to build up an emergency savings fund to avoid the need to dip into your investments.
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