What is a stocks and shares ISA?

A stocks and shares ISA (individual savings account) lets you invest your ISA allowance in stocks, investment trusts, managed funds, corporate bonds and other listed assets with the aim of taking advantage of potential stock market returns. This gives you an easy way to save a regular monthly amount or invest a lump sum. With a stocks and shares ISA, you get to choose how your money is invested.

The stocks and shares ISA, along with the cash ISA, was introduced in April 1999 and since then the amount annually invested in stocks and shares ISAs has grown to over £20bn.

How do I qualify?

Any UK resident (for tax purposes) over the age of 18 can open a stocks and shares ISA.

Want to open an ISA for your children? You can do that using a junior stocks and shares ISA, which can be set up in the name of a child so parents can create these to save for things such as university fees.

Annual allowance

There is a limit on how much can be invested into an ISA in any tax year. This limit has steadily risen since the ISA was introduced in 1999, from £7,000 to the present day limit of £20,000. This amount can be split in any form across a cash ISA and a stocks and shares ISA.

Points to consider

Minimum investment

Many ISA providers will have their own rules around the minimum investment amounts. Some accounts may require a minimum lump sum investment when opening the account, while others might ask for a minimum monthly payment, or both. Read the terms and conditions of the individual ISA provider to ensure you know what you are signing up for.

Charges, fees & costs

ISA providers may charge a range of fees depending on how active or passively managed your account is. There is typically no setup fee, but there will normally be an ongoing management fee of up to 1%. There may also be additional fees depending on the types of investment held in the account as well as for the trades themselves.

Asset options

While it's possible to hold many types of asset in your ISA account, not all ISA providers will allow all ISA allowed assets to be held in their accounts. The ISA provider may not deal in certain asset types therefore they are not offered for the ISA account. Take not of which asset types are allowed in the account before signing up.

Transfer between accounts

You can transfer your ISA to another provider or ISA type (e.g. from a cash ISA to a stocks and shares ISA) at any time. The only real stipulation is that if you want to transfer the money you've paid into your ISA in the current tax year, you must transfer the full amount. For old ISAs, the amount you transfer is up to you.

Before paying into a cash ISA, check the rules around transferrals with your provider and if necessary, seek independent advice.

To transfer between ISA providers, follow these steps:

1. Contact the new provider and set up an ISA account with them
2. Complete an ISA transfer form, which will ask for details of ISAs you would like to transfer and, where it is a previous year's ISA, how much of it you would like to transfer
3. Decide whether you want to move across all your existing holdings or sell all/part of your holdings first and transfer the cash value
4. Wait - your new provider will arrange the transfer on your behalf and it should be completed within 30 working days of your initial request
5. Your new provider will notify you when your transfers are completed

Assets options

Funds, unit trusts and OEICs

In effect, these are three types of the same asset: a trust formed to manage a portfolio of stock exchange securities, which small investors can buy into. Prices are set once a day and reflect inflows and changes in value to the underlying investments.

Investment trusts

Investment trusts are companies set up to manage and invest a fixed pool of investment. They can borrow to invest, which boosts returns in a rising market, and pay dividends out of reserves. Investors buy or sell their shares in the stock market, incurring dealing charges.

Tracker or index funds

These are investment funds that track an index. Given these are not actively managed, they typically charge far lower management fees.

Exchange traded funds (ETFs)

ETFs are similar to tracker funds, except instead of tracking an index they track a group of shares on the market.

Inc and Acc

These are income units (inc) and accumulation units (acc). Income units distribute any interest or dividend income from the fund to you, while accumulation units reinvest the dividends in more units.