With the tax-free ISA deadline edging nearer, you may be thinking about opening a stocks and shares ISA. However, if you’re new to investing, it can be tricky to know where to begin. With this in mind, here are three nifty tips to get you on the right track.
How does a stocks and shares ISA work?
A stocks and shares ISA is just a fancy name for a tax-free share dealing account. The government currently gives everyone (aged 18+) an annual limit to invest without having to pay tax on any returns.
For the 2021/22 tax year, the tax-free allowance is £20,000. The allowance will remain at £20,000 for 2022/23 when the new tax year begins on 6 April.
Importantly, if you don’t use your annual ISA allowance – which covers both stocks and shares ISAs and cash ISAs – you lose it. So, if you’re thinking of opening an ISA to take advantage of this year’s allowance, then you have less than two months to act.
How can beginners open a stocks and shares ISA?
If you haven’t opened a stocks and shares ISA before, then here are three tips to get you started.
1. Get to know your investing style
Whether you choose to invest through a stocks and shares ISA or a normal investing account, it’s really important to understand your investing style. For example, do you plan to take an active or passive approach to your investing?
Active investors rely on research, typically preferring to pick and choose their own stocks. Passive investors, on the other hand, may opt to open an index tracker fund and ride with the market.
There is no right or wrong answer on this, though it’s worth taking the time to read the Motley Fool’s guide to passive vs active investing to determine which style you’re most comfortable with.
2. Invest with a long-term horizon in mind
There’s little point rushing to open a stocks and shares ISA before April to take advantage of this year’s tax-free allowance if you plan to withdraw your investments within the next few months. Therefore, it’s best to think about how long you plan to invest for. Typically the longer the better, especially if you’re on the youthful side!
It’s also worth bearing in mind that investing for the long term can make you less likely to ‘panic sell’ your investments during a stock market crash. History has shown us that investors who don’t let emotions dictate their investment decisions often perform better than those who do.
To put it another way, if you have a long-term investing horizon, you may be less likely to be influenced by your emotions.
3. Choose the right stocks and shares ISA platform for you
To open a stocks and shares ISA, you’ll need to choose an investing platform. Once you do this, you can buy your investments through your chosen platform within a tax-free wrapper. However, before diving in, carefully choose your provider in order to minimise the fees you pay.
At first glance, it may not appear easy to determine which providers are the cheapest. That’s because some providers, such as the Hargreaves Lansdown stocks and shares ISA, charge clients a low platform fee (up to 0.45%). However, this is countered by a reasonably hefty £11.95 share dealing fee.
The IG stocks and shares ISA, on the other hand, has a fixed platform fee of £8, and a lower £8 share dealing fee.
As a result of these differing charges, which one is cheapest will depend on whether you plan to trade regularly or take a more laid back approach once you open an account.
In other words, if you trade small amounts regularly, you may wish to opt for an account with a lower share dealing fee. If you plan to buy shares less regularly, then it may be better to go for an account with a low platform fee.
For the full lowdown on these accounts, plus other options, see The Motley Fool’s top-rated stocks and shares ISAs.
What else should you know about stocks and shares ISAs?
As with any investing, it’s important to understand that the value of your investments can fall as well as rise. Always do your own research before opening an account.
While the above tips can help put you on the right path, do also take the time to familiarise yourself with the investing basics.
Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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About the author
Karl is a writer specialising in investing and personal finance content. He regularly contributes articles on savings, bank accounts, mortgages, and loans. He was previously a Personal Finance Writer for MoneySavingExpert.
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