5 Opportunities and Risks: Stocks and Shares ISA

Summary

• Stocks and Shares ISA, while have the potential to give high returns, they are also riskier compared to other types of ISAs.
• An investor must keep in mind several factors such as risk capacity, investment goals and others before deciding to invest in a Stocks and Shares ISA.

Individual Savings accounts (ISA) is savings account that is exempt from paying taxes. However, the maximum amount an individual can invest in ISA in a tax year is capped; for this year, it is £20,000.

A Stocks and Shares ISA is an ISA made for investing purposes. Some types of investments instruments for such an ISA include stocks and shares, bonds, gilts or commercial properties.

Stocks and Shares ISAs can be an attractive investment strategy for an individual investor however, they come with their own set of risks as well. In this article, we will explore some of the key opportunities and risks to provide a transparent overview of Stocks and Shares ISA.

Some of the top opportunities for investors looking towards building a stocks and shares ISA portfolio investment are:

1. Tax free investment: A stocks and shares ISAs investment will grow an individual investor’s portfolio in a tax-free manner thus, saving an investor from having to pay income or capital gains taxes. According to the current annual allowance, a stocks and shares ISA can save up to £20,000 in the current tax year. Also, annual allowances start fresh for an individual every new tax year.
2. Transferable: One can transfer their pre-existing ISAs to a new ISA. Also, a stocks and shares ISA is available to UK residents aged between 18 and 80 years old.
3. Higher returns over the long term: They are also designed for creating savings for the medium to long term and is ideal for investors looking to invest in the future. And they generally have the potential to give higher returns than their cash ISA counterparts.
4. Flexible options: An individual can make investments in different ways, such as making regular monthly payments or via a lump sum investment or by transferring an existing ISA.
5. Exposure to the large range of financial instruments: This type of ISA can allow investors access to invest funds or investment trusts and government and corporate bonds in addition to equities. Funds also allow investors access to a wide range of commodities, which can help lower the overall investment risk due to diversification.

Also Read: What is an ISA?

However, stocks and shares ISA also come with its own set of risks such as:

1. Market risk: While stocks and shares ISA can give higher returns, they also are sensitive to risk since it is linked to the capital markets and thus have market risk. An investor’s ISA position can fall in value due to external shocks such as adverse economic events.
2. Inflation risk: Since these investments are better suited for the long term, they all carry the risk of not sufficiently keeping up with inflation over the investment time horizon.
3. Default risk: The possibility of a company an ISA holder had invested in, not being in a position to repay their debt, is the type of default risk this type of ISA contains.
4. Liquidity risk: The risk of not being able to withdraw or liquidate one investment position in a timely manner or being forced to accept a lower price for liquidating the investment. One of the ways to combat this challenge is by investment an amount that the investor is comfortable with not using for their decided upon investment time horizon.
5. Longevity risk: The possibility of having a higher-than-expected life expectancy or survival rate, which effectively will lead to not having sufficient funds to continue living on.

Overall, the stocks and shares ISA can be a good investment option if an individual keeps in mind the risk it carries. An investor must decide upon their risk threshold, time horizon, and long-term investment goals to best decide on their appetite for undertaking this investment method.

Also Read: Which banks offer stocks and shares ISA