Before we tell you about stocks and share ISAs, perhaps it’s best to takes a few steps back and start with a more basic question: what in heck’s an ISA? ISA is short for Individual Saving Account, and it’s the account that any resident of the UK over the age of 18 is entitled to open, and really should. What makes getting an ISA so vital? ISAs allow tax-free growth on any investment, and considering that you’re allowed to deposit £20,000 into ISAs every year, a lifetime of annual investments could easily yield hundreds of thousands in tax-free gains.
There are two primary kinds of ISAs. There’s the plain old cash ISA, which is the kind of ISA your local bank branch offers. In the very short term, they’re useful places to park your money. There’s no risk, but the interest rate your bank will offer will seldom reach even 2% annual equivalent rate. If you’re a long-term investor — that is, if you plan to hold onto the money for at least five years — it would be insane to keep your money in a cash ISA. You’ll instead want a stocks and shares ISA.
Stocks and shares ISAs contain equities rather than cash, and are a perfect way for regular folk to participate in the stock market. What you put in your stock and shares ISAs is entirely up to you. You could invest every penny in the latest technology stock, or in cattle futures, or even a managed fund that invests in classic cars. But we’d vigorously dissuade you from putting all your eggs in one basket in this fashion. You could also invest in unit trusts, a group of stocks and bonds bought and sold at the discretion of a fund manager who’s expenses are paid for through a management fee you pa — generally around 1% of your entire investment annually.
Wealthsimple humbly suggests a third option — that you consider a diversified portfolio of ETFs, or exchange-traded funds, which are bundles of stocks or bonds that mirror the performance of the overall market and boast very low management fees. Over the long term, these so-called passive investments by and large outperform the more expensive actively traded unit trusts.