A beginner’s guide to stocks & shares ISAs - and how they are different to cash ISAs

by Derin Clark

With savings rates continue to fall, some long-term savers have started considering stocks & shares ISAs as an alternative. Stocks & shares ISAs are often seen as attractive to investors as they have the potential to offer much greater returns on the investment compared to interest rates on standard savings accounts.

Saying this, the potential for greater returns also means greater risks, and investors should always be aware that stocks & shares investments carry the risk of not only achieving zero profits from money invested, but investors can also lose the initial lump sum deposited as well.

The good thing about stocks & shares ISAs is that you don’t have to be a finance expert to set one up or manage your investments, as there are now accessible platforms that will do this for you and many are designed for beginner investors – although these platforms do charge additional fees. As well as this, you don’t need tens of thousands of pounds to start investing, but instead you can set up a stocks & share ISA with a moderate amount of savings.

However, before considering investing in a stocks & shares ISA, it is important to have some financial knowledge and fully understand the risks involved in the investment.

Stocks & shares ISAs vs cash ISAs

A cash ISA is a savings account that has the benefit of allowing up to £20,000 in tax-free deposits during the 2020/21 tax year. Most ISAs you see being offered by your bank or building society will be a cash ISA.

Within cash ISAs, you get a number of different types of accounts, but the most common are easy access ISAs (which allow instant access to the money deposited), and fixed rate ISAs (which require the money deposited to be left untouched in the ISA for a predetermined period of time, for example five years). These ISAs will offer an interest rate, which is the money the bank will give you for depositing your money into their ISA, and savers can guarantee that they will receive both their initial deposit and the interest accumulated on the savings.

A stocks & shares ISA also allows £20,000 in tax-free deposits during the 2020/21 tax year, but these ISAs involve investing the money deposited into stocks and shares. This means that if the stocks and shares the money is invested in do well, they can achieve much higher returns than cash ISAs. But if the stocks and shares do not perform well, they can result in the investor losing all their money, including their initial deposit.

Normally, to try and safeguard investments as much as possible, investors will diversify the money invested by investing in a range of different types of stocks and shares. The idea behind this is that if one of the investments performs badly, there is money in other investments that will perform well.

Normally, a stocks & shares platform will encourage investors to diversify their investment by offering a wide range of different types of stocks and shares – you can find out more about investment platforms by reading the Moneyfacts.co.uk guide, UK investment platforms explained.