My Stocks and Shares ISA is a great tool that I can use to house my investments. It’s a provision from the government that allows me to invest up to £20,000 a year. Any funds placed in the ISA are free from capital gains tax, so if I sell any stocks in the future for a profit, I’m not liable for tax on it. That’s why I’m looking to use top growth stocks to fill my ISA.
Defining a top growth stock
Sometimes using the phrase ‘top growth stocks’ can be a little ambiguous. At a general level, it refers to companies that are seeing high levels of revenue growth and an increasing market share. This doesn’t always mean growth in profits, as some technology companies can be loss-making for years before turning the corner. So the growth element of a growth stock can also be forward looking, having a positive outlook about the size of the business years down the line.
The fact that different companies could be included in the umbrella term of a top growth stock actually makes my life easier! It means that I’ve got a lot of choice to pick my favourite companies for my ISA.
Building momentum over time
The benefit of using growth stocks for my ISA ties in with the annual allowance. Personally, it helps me to take a long-term view of my portfolio. This is because my allowance resets each year, giving me the opportunity to invest again. In reality, I’m unlikely to max out my £20,000 each year, but it mentally gets me in the right space for continued investing over time.
Given the fact that the growth stocks I’ll be targeting have a positive outlook into the future, I should see the benefits down the line. The fast paced nature of growth stocks also means that what’s hot now will likely be replaced with something else next year. The old stock won’t necessarily be out of favour, likely just more mature.
So by investing each year in the new companies at that time, I can develop a conveyor belt of top growth stocks. Over the years, these should fulfill the potential, something that will hopefully be reflected via a higher share price. With no capital gains tax when I sell the stock, I don’t need to be worried about the unrealized gains over the period.
Noting the risks
There are risks in me pursuing this strategy. Top growth stocks aren’t guaranteed to perform well at all. In fact, these type of stocks offer me a higher risk than normal. For every one business that really takes off, there will be several that will fall be the wayside. So I need to be prepared to accept this risk. One way I can try and minimise this is by holding a lot of companies, to diversify away some firm-specific risk.
Another risk is that these type of shares typically have very high volatility. Speculative retail traders can cause the share price to surge or dump in the short term. So I need to make sure I keep my emotions in check!
Overall, I think that having an allocation to top growth stocks in my ISA is a good idea.
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Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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