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How to invest in a stocks and shares Isa

Ed Bowsher runs through the nuts and bolts of opening a stocks and shares Isa, and gives you some investment ideas to consider.

Don’t forget, a stocks and shares Isa protects you from paying capital gains tax (CGT), and you don’t even have to tell the tax man you have the account.

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Transcript

Hi, in this video I'm going to look at how to invest in a stocks and shares Isa. Now, for this video I'm assuming you already know about stocks and shares Isas, and cash Isas, and the rules for how much money you can put into each one. If you want to find out more about the rules, check out my video, the Isa Revolution 2014. But I'm assuming today that you've already figured out the rules and you've decided you do want to invest in money in the stock market, and you want to put it in the stocks and shares Isa tax wrapper.

So now you've made that decision, you want to know how you're actually going to make that investment. What are the nuts and bolts? Well, the first step is to pick your investment platform. These platforms are sometimes named as fund supermarkets and that's a really good description because basically an investment platform is a shop where you can invest your money in a wide range of different possible investments. Fund supermarkets are slightly misleading though, because it's not just funds you can invest in. You can also invest in investment trusts and in individual shares.

So, the great thing about investment platforms is that they give you all this choice. The charges are cheap, you can manage your investments online and the platform does all the boring admin for you. The dividends - if you get any dividends - are paid straight in to your online platform account. The best known investment platform is probably Hargreaves Lansdown. It's definitely the biggest player in the UK market and it offers good customer service, a really nice website and it's got a very strong brand.

The trouble with Hargreaves Lansdown is the platform charges you'll be paying are higher than pretty much all of the company’s rivals. So, you may want to go elsewhere and pick a platform that's cheaper. Now sadly I can't just recommend one platform for everyone. It depends on your circumstances, how much money you're going invest, are you going to invest in funds, in shares, or a combination of the two. Depending on your approach different platforms will work best.

If you want to research all the leading platforms, check out our online brokers cost comparison table  and you should get a feel for all the top guys.

Having said that, I know that you probably just want me to give a couple of names. So, here are two names of good reputable platforms. One is Charles Stanley, another one is AJ Bell You Invest. The charges are low on both platforms and they're run by reputable companies, so you should get a decent service.

So, we've not chosen the platform. The next step is how you're actually going to invest. What kind of stocks and shares are you going to buy?

The classic thing to do - the easiest thing to do if you like - is to put your money into an index tracker fund. These are funds that track a particular index. So, if you put your money in a FTSE 100 tracker index, you would effectively buy in shares in all of the hundred largest companies on the London stock market.

Then if the FTSE 100 goes up by 10%, your index tracker fund should go up by roughly 10% too. One of the best UK index trackers is the HSBC FTSE All Share Index. It's got an annual charge of 0.17% - nice and low. With this fund, you won't be invested in just the hundred largest companies on the London stock market, it'll be more like 600 companies. So, as that index goes up, your investment should go up too.

Just to be clear though, you won't just pay the 0.17% charge, you'll also pay a charge to the platform, whether Hargreaves Lansdown, Charles Stanley or whoever. The platform charges typically will be between 0.25% and 0.45%, but it does vary depending what you're investing in.

Now, this fund isn't the only cheap way to invest in the UK stock market. You could also go for an ETF – an exchange traded fund. These are very similar to the ordinary investment funds, but then also a bit like a share that traded on the stock market so it's really easy to buy and sell.

There's one really cheap UK ETF which just tracks the FTSE 100. It's the Vanguard FTSE 100 UCITS ETF - its charges are even lower than the HSBC index tracker. It's just 0.1% a year. Having said all that, both of the funds I've just recommended are great.

But it's probably a mistake to put all of your money in the UK stock market. You need to get more global diversification. You can do that with the Fidelity World Index Trust. It's an index tracker which tracks companies in all of the leading stock markets around the world including the UK and you'll be paying a 0.3% charge for that fund.

Now, just to be clear, there's loads of other index tracker funds out there. There's loads of other ETF's out there that operate a passive investment policy, ie they're just following particular stock market indices.

You can also invest in actively-managed funds where you've got fund managers who are picking the investments for you. I haven't got time to recommend any funds right now, but there's loads of information about all the best actively managed funds on the Citywire website.

Then, of course, you could decide just to pick individual stocks yourself. That's what I do for a lot of my money, and it's a great way to try and really deliver strong performance if you get it right. I haven't got time to highlight any individual shares today, but if you start reading Money Week magazine and you keep reading it for a couple of months every week, you'll soon start to pick up some nice stock ideas for your portfolio.

So, that's a really quick overview of getting a stocks and shares Isa. The really important part is to get on the platform and click on the Isa button. That'll tell you how to do the basic process of logging on and then you're ready to get investing without paying much tax. Good luck with that.

I hope to be back with another video next week. Until then, good luck with your investing.

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3 Responses

  1. 04/04/2014, mikeT wrote

    A lot of platforms (like Fidelity) offer “portfolio managers” (often provided by Morning Star). These are useful BUT MS cannot provide the fixed income duration of many “mixed asset” funds (often “fund of funds”), even though it does have enough information to return the asset allocation. So…when you look at your “portfolio duration”, it is likely to be wrong if you have any mixed asset funds. MS do not publicise this defect widely; they have promised to substitute “dashes” for zeros in the duration field of funds they cannot analyse (which makes everything really clear,right?) and did post a non-specific duration warning in their portfolio manager some 3 weeks after I first complained – but nothing about being very cautious if you have the “wrong” popular funds.
    I struggle to believe that “brands” as big as these can get away with this (whatever responsibility waivers they small print)! How many readers have trusted, and traded, on this misinformation, and for how long? Comments please, Ed?

  2. 10/04/2014, mikeT wrote

    Ok- nobody seems to get as excited about this defect as me so let me give 2 examples. Citywire published its “top 10 ISAs” on citywire.co.uk/new-model-adviser/tax-year-top-ups-advisers-favourite-funds-for-isa-season/.
    Of these, 3 (Old Mutual, WHEB and Franklin) are all equity; 3 (Dimensional Global, Dimensional Multi Factor and Fidelity Money Builder) have bond allocations of 97.24%, 50.78% and 23.62% and durations (hurray!) of 3.9, 3.79 and 6.97. The remaining funds – M&G Optimal Income Fund A Acc (quite large and popular, I believe) 85.55% bond, SWIP 5.47%, Cirilium 8.11% and Prudential 59.88 – have nothing about duration. SO…getting on for 50% of the “portfolio’s” duration is unreported.
    MS itself published its “Top 5 Bond Funds” for ISAs on http://www.morningstar.co.uk/uk/news/123383/5-top-rated-bond-funds.aspx?ut=2
    Of these, ONLY JPMorgan Funds – Global Aggregate Bond A had an “Effective Maturity” and “Effective Duration”; Legg Mason had only duration; Templeton Global Bond A Acc $ had only maturity; Blackrock and Invesco had nothing!!
    My point – MS is misleading investors about the effectiveness of the information service it provides, particularly if you rely on Portfolio Manager. (At the same time, it publishes numerous articles on “Managing duration/risk/asset allocation”.) I think this is wrong!

  3. 18/04/2014, Obremski wrote

    ED

    Presentation much improved….much clearer writing in the background ….look forward to many more …well done
    re financial situation …the old adage applies …”things seldom work out as good as our expectations OR as bad as our worst fears
    best wishes

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