Our ultimate beginner's guide to stocks and shares ISAs – how to turn £100 into £18K and the five-year rule to follow

The Sun

2 days ago

A STOCKS and shares ISA could be the key to turbocharging your savings, and you can start with as little as £1 a month.
We explain how you can turn £100 into £18,000, what the risks are, and how to find the right one.
A stocks and shares ISA allows you to invest your cash into the stock market tax-free, and you can save up to £20,000 a year into the account.
Unlike a normal savings account, where you earn a set amount of interest, the money you make depends on how well your investments have performed.
That means the amount of cash you have could go up or down, but over a long time, you should see your money grow, and the returns are better than with a cash savings account.
Studies using data all the way back to 1899 show that the UK stock market has a 90% chance of beating cash savings over a 10-year period.
You can start with just £ 1
You can start investing in a stocks and shares ISA with just £1.
Before you begin, you should make sure investing is right for you.
You should have an emergency fund with three to six months' worth of wages saved before you start, experts say.
And you should keep this money in a savings account so you can access it if you need to.
Stocks and shares ISAs are offered by several major banks including NatWest, HSBC, Barclays and Lloyds Bank.
Most high street banks will ask you to open a current account with them before you can get a stocks and shares ISA.
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You can do this online, in a branch, by telephone or using an app.
If you don't want the hassle of opening up a current account alongside your stocks and shares ISA, you can use an investment platform such as AJ Bell, Hargreaves Lansdown or Fidelity.
How to pick the right account
When you open an account with a bank or investment platform, you will usually be able to choose between a selection of ready-made investment funds.
These will range from low to high risk and are designed to help you meet different financial goals.
A low-risk fund will normally focus on less volatile investments, such as bonds.
Meanwhile, a higher-risk fund will invest your money in riskier assets, such as shares.
This means that you have the chance to make a higher return, but also a bigger loss if it doesn't work out.
Some providers will ask you to complete a short quiz when you sign up for a stocks and shares ISA to help you decide which of these ready-made plans to choose.
The quiz will ask you about your goals and risk appetite.
My stocks and shares ISA increased in value by £50k
NEERAJ Kumar opened a stocks and shares ISA in 2002 as a way to invest in the UK stock market.
The grandfather-of-two, 64, who lives in Bristol, wanted to save money for retirement and to help him become mortgage-free more quickly.
He started with £1,000, which has now grown to a staggering £200,000 23 years later.
Neeraj, who works in IT, said: 'I am a fan of ISAs and investing in the market for longer-term investments.
'They usually outperform cash deposits, and you do not need to worry about declaring any money you make on your tax return.'
His ISA is with Halifax, and he hand-picks the stocks and shares he wants to invest in.
The account charges £9.50 per online trade to buy and sell funds and UK stocks.
There is also a £36 annual customer admin fee.
Neeraj pays into the account when he can, but does not have a set direct debit.
He estimates that around £150,000 of his £200,000 pot is money he has paid in, which works out at around £6,500 a year or £541 a month.
This means he has earned £50,000.
'I feel secure and confident to have my savings,' he said. 'I have even set up ISAs for my wife Sangeeta, my two adult children and two grandchildren.
'I want to put that same savings habit into all my family.'
You don't have to opt for one of these ready-made plans, but they are popular with first-time investors.
When you choose one of these plans, your cash will be invested on your behalf, and you will be given a breakdown of where your money is held.
It will be monitored, and your investments will be adjusted by a professional team depending on changes in the market and the fund's goals.
For example, if you choose the low-risk "defensive" fund at Barclays Bank then 66% of your money will be held in cash, 16% will be kept in bonds and 18% in shares.
The medium risk "balanced" fund keeps 56% of your money in shares, 42% in bonds and 2% in cash.
In comparison, if you put your money in the "adventurous fund" then just 2% of it would be held in cash, 9% would be kept in bonds and 89% would be invested in shares.
As a result, the "defensive" fund has an estimated return of 2.11% after 10 years.
If you opened the account with £100 and continued to pay in this amount every month for 10 years, then you would be left with £13,470.
The balanced fund has an estimated return of 5.2% after a decade.
You would have £15,864 after 10 years - £2,394 more than with the defensive fund.
Meanwhile, the adventurous fund is predicted to give you a return of 7.33%.
If you invested in the same way into the adventurous fund then you would have £17,834 after a decade.
This is £4,364 more than you would earn with the defensive fund.
Most banks and investment platforms will let you set up a direct debit to invest a set amount each month, so you don't even need to remember to do it.
Know the risks
IF you have enough money in your emergency fund and are ready to invest then the returns can be huge.
But remember, the stock market can fall as well as rise.
The FTSE 100 fell by more than 10% this year after US President Donald Trump announced plans to introduce tariffs on goods imported to the US from other countries.
Jason Hollands explains: "When the news headlines about the economy are downbeat and markets are falling or paralysed by uncertainty, many people shy away from investing altogether.
"However, these often prove to be the best times to put money into the stock market, as you end up buying shares when they are cheap.
"Regular investing helps keep you doing this through thick and thin."
Dips in the stock market are only a problem if you need to access your money immediately.
If you are investing for the long term then the market will usually bounce back before you need to access your funds.
Rises and falls in the market are called "volatility" and usually happen every few years.
Always remember, you need to be prepared to lose any money you invest.
This can help you to invest consistently, which should boost your return over the long term, even if the stock market falls.
However, be warned that you should only invest money that you can afford to lose.
Remember the five-year rule
One of the golden rules of investing is to make sure that your money is locked in your investments for five years.
That's so your investments have time to ride out any dips in the market when stocks fall in value.
That means that investing is usually better for longer-term financial goals - such as saving for a house, or for your retirement.
Dips in the market can have a big impact on the money you can make from your investments.
Say, for example, you invested £100 a month into a defensive stocks and shares ISA with NatWest - you are likely to have £16,027 after 10 years.
You would have paid in £12,000 in total, which means your investment would have increased in value by £4,027.
But if your investment performs worse than expected, then it could be worth £12,024 after a decade - giving you a return of just £24.
Meanwhile, if your ISA performs better than predicted, then you could have £22,424 after the same period - £10,424 more than you invested.
Charlene Young, senior pensions and savings expert at AJ Bell, said: "How your own ISA performs will depend on the investments you choose and how much you can put away.
Three reasons to consider a stocks and shares ISA
SARAH Coles, head of personal finance at Hargreaves Lansdown, explains three reasons why you may want to open a stocks and shares ISA.
Save for university: Children can get a stocks and shares version of a Junior ISA. This account lets you save for your child's future and they can access the money when they turn 18. You can invest up to £9,000 every year without paying income or capital gains tax.
Build up a house deposit: If you are aged between 18 and 39 then you can get a stocks and shares lifetime ISA. The government will top up your contributions - up to £4,000 a year - by 25%. You can use the ISA to buy your first home as long as it is worth less than £450,000 and you are aged under 50.
Save for retirement: You can also use your Lifetime ISA to save for retirement. Withdrawals are tax-free from the age of 60 onwards. If you withdraw money for any other reason, you will pay a penalty.
"Investing your money gives the best chance of beating cash and rises in the cost of living over the long term."
Watch out for fees
Every bank and investment platform sets its own fees, and these should be made clear to you when you open an account.
These pay for the costs of running the account and fund, investment manager fee, administration costs and legal fees.
For example, NatWest charges a fee of 0.55% of the value of your investment.
That works out at 55p for every £100 of your investments.
In comparison, Barclays charges a 0.25% fee, which works out at 25p for every £100 you invest.
Other providers will charge you a fixed amount to invest with them.
Among them is Interactive Investor, which charges customers on its Investor Essentials plan £4.99 a month.
If the value of your investments grow above £50,000 then you will be moved onto the £11.99 a month Investor plan, which charges some of the highest fees of any provider.
Charlene Young said: 'The impact of higher charges can eat into your ISA value over time and mean you're giving away more of your tax-free investment returns.
"Shopping around for the best deal to meet your needs can make a huge difference to the end value of your ISA."
She added that someone who starts investing £100 a month could end up with £3,000 more in their pot after 30 years if they reduced their ISA charges by just 0.2%.
You can use websites such as Moneyfactscompare.co.uk and Forbes to compare ISA providers and their fees.