Although often referred to as an ISA investment account, an Individual Savings Account (ISA) is not actually a type of investment itself. It is a means of protecting some of the investments you make every year from taxes.
While the annual ISA allowance for individuals may change on an annual basis, it is currently possible to invest or save a total of £11,520 in a combination of cash ISA and stocks and share ISA. Assuming that you have your finances in good order, you are typically advised to take advantage of as much of your annual allowance as possible – it doesn’t roll over, so you will lose any unspent allowance at the end of the year.
Cash ISAs
You can save up to half of your annual allowance in a cash ISA. This type of ISA is basically a savings account, but because it is wrapped up in an Individual Savings Account it means that you will not have to pay interest on the capital itself or on any interest that you earn.
You cannot use more than the £5,760 for a cash ISA, but you may choose to invest less than this, and use any remaining amount to invest in stocks and shares ISAs.
Why Choose Cash ISAs?
Cash ISAs are considered a stable and secure form of investment ISA. Whereas stocks can be volatile, offering the possibility of profit and the danger of loss, you should be able to choose a cash investment ISA that protects your capital.
Easy access cash ISAs enable you to access the money in your account whenever you need it. If you do not have cash savings held separately to your investment portfolio, then you should consider this type of account, although the interest you earn will be lower than with a fixed term cash ISA.
Stocks And Shares ISAs
Rather than saving your money, you can choose one of the many types of stocks and shares investment ISA that are on the market. These enable you to invest in one or more stocks, securities, and bonds.
You are able to use the whole of your ISA allowance on stocks and shares bonds, if you wish, and you can choose whether you want to invest in a single company, a small number, or hundreds of organisations. As well as choosing stocks individually, you are able to choose funds and managed investment accounts.
Why Choose Stocks And Shares ISAs?
Stocks and shares are more volatile than cash. You should be aware that there is the possibility of losing money, as well as the potential for gaining money when you invest in company stock. Your investment will be guided by the performance of the companies you invest in.
As well as increased risk, however, stocks and shares also offer improved potential for profits. You could see your investment increase considerably, especially if you are able to leave your investment in place for a number of years. Generally, stocks and shares are less likely to lose money over a longer period of time, so long term investments should yield the greatest returns.
Types Of Stocks And Shares ISA
The most secure form of stocks and shares are securities or bonds. Companies and organisations offer a fixed amount of interest for people that buy the bonds. These are usually fixed term, and you should ensure that the interest you are set to receive is likely to be an improvement over inflation, otherwise you could be losing out on potential profits.
You can invest in stock in a single company, choose your own portfolio consisting of a number of companies, or invest in managed funds that have their own investment portfolio. The latter offers greater diversification in your investment ISA portfolio.
Creating A Diverse Investment ISA Portfolio
Creating a diverse portfolio is important, because it enables you to control the level of risk that you face. You can combine cash and investment ISAs, as well as investing in a broad selection of companies. Choosing a fund that has dozens of companies as part of its portfolio will certainly help to spread the risk, and there are many of these accounts. Some funds invest in specific types of stock, while others use the expertise of their fund managers simply to look for the highest returns.