Can you explain Stocks&Shares ISA in simple terms?(11 Posts)
Cash ISA rate is dropping again, so I am wondering if Stocks&Shares ISA is worth a try.
I think you buy units in investment trusts and they go up and down in value. At some point they pay you something - dividend?
Then you can sell them eventually and with luck they will be worth more than you paid.
Is that it? How do you work out what interest rate you get?
There isn't an interest rate. You get a yield and or growth. Collectives such as OEICs or Unit Trusts might be a good first step, investment trusts are more complex as their structure is close ended and their value can be less than the investments they hold.
No 'interest' is guaranteed. Your money can go up or down in value. However, there different products have different risk levels. If you go with a low risk product, you will only lose a little if things go bad but when things are good, you will only make a little too. With high risk products you can make more money but you can lose more too.
Bear in mind though that generally over 5,10 or 20 years, your money is likely to grow considerably so it makes a lot of sense in the long run. But if you're looking to put your money away for just a few months or a year then you might prefer a savings account.
Dh and I both invested the same amount -him in the safe option and me in Stocks and Shares.
It has certainly had some blips over time, but mine has more than his in it now. We compared statements recently and he was a bit gutted!
But, it's riskier - I had another investment that lost loads in a short space of time. Not talking masses of money here, but I lost a £1000 ish.
I am still happy with my stocks and shares ISA as it's a long term investment.
If you are looking for income, find a fund that offers income or yield. Other funds offer capital growth instead of income - the value should grow over time but you won't get income in the meantime.
Look at the costs. Costs really eat into investment performance so it's worth taking something low cost.
I pay into a stocks and shares ISA monthly - in theory the ups and downs even out as you are buying at different points. It is also a ftse 100 tracker so again ups and downs should even out over time.
Put very simply, buying a share is buying a very small part of a company; effectively, you own a share of the business and a share of the profits. The "ISA" bit is just the wrapper it comes in. What that usually means is that you pool your money with lots and lots of other people (in a fund) to buy buy a small share of lots of different companies in the hope that a) those companies will grow their sales and profits and will be worth more (and hence the share price will go up) and/or b) the companies will make lots of profits which they will give back to their shareholders (their owners).
Put very simply, buying shares is usually seen as a medium/ long term investment (as values can fluctuate) with a higher risk/reward trade off than cash. You are buying parts of companies. Those companies can be hugely successful (e.g. Apple) or can fall in value (e.g. as M&s has as fewer people buy clothes there). The big advantage of investing in a fund is that you diversify that risk by buying a tiny bit of, say, 70 companies rather than a small bit of one. You don't put all your eggs in one basket, to put it in simple terms.
...and you don't get an interest rate. You get a return on your capital, either from the value of the shares you own increasing (the share price going up) or from being paid a dividend (which will be an amount per share). Your total return is comparable with an interest rate on cash if you are comparing investments; the interest on cash is, if you like, the return you make on your cash capital.
Buying shares is riskier (a company can go bust and therefore shares can be worthless, whereas money in the bank is always worth that
...sorry - that nominal amount.
Basically - cash ISA equals low risk and low return. Shares are a higher risk and therefore a higher return. If you don't need the money for 5/10 years, shares are likely to be a better bet.
Index trackers are low cost ways to get exposure to shares as the management charges are often much lower and eat less into the value of your investment over time.
And please look for "funds" (a generic term but will probably denote an OEIC or unit trust, which is what you want). If it's an "investment trust" then as a pp has already said, it's probably not right for you (although if you know what you're doing and don't need liquidity, investment trusts are fantastic).
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