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A stocks and shares ISA (individual savings account) is one of the types of ISA available. It’s a tax-efficient account for investing your money, you won't have to pay income tax or capital gains tax on any profit you make or money you take out.
But is a stocks and shares ISA right for you?
Well, they involve more risk compared to their cash ISA counterparts so they’re not right for everyone. Be aware that the value of investments can go down as well as up, so you may get back less than you paid in.
Who is a stocks and shares ISA for?
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If you have money to spare each month
You should only invest if you can afford to, for example if you have money left at the end of the month that you don’t need for essentials. You don’t necessarily need a lot though – many stocks and shares ISAs let you start investing with just a small amount each month.
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If you have an emergency fund
The independent, government backed MoneyHelper service recommends that you have enough in cash savings for an emergency fund to cover three to six months of spending.
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If you have longer-term goals
When you invest, the ideal timeframe tends to be at least five years. This can help ride out rises and falls in financial markets. It also gives your investments time to potentially benefit from compound growth, where any profits you make are reinvested so you have the potential to earn returns on those profits too.
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If you’re comfortable taking some risk and you can afford to do so
If you’re comfortable taking at least some risk in return for the potential for higher rewards, and you can afford to potentially lose money you’ve invested, then investing may be right for you.
Who is a stocks and shares ISA not for?
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If you have debts
If you have credit cards, overdrafts or other short-term debt, it may be better to pay these off before investing. Investment returns are likely to be below the interest rates you’re charged on these debts.
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If you don’t have an emergency fund
Without savings, you may be forced to dip into your investments if you suddenly need financial support. This could mean selling your investments at a loss.
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If you have shorter-term goals
If you’ll need access to your money within five years, there may not be enough time for investments to recover from any market fluctuations or benefit from compound growth. This could put you at greater risk of getting back less than you paid in.
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If you can’t afford to lose money and/or aren’t comfortable taking any risk
This means investing is unlikely to be for you. Saving in cash is an alternative, but this also involves risk. If the cost of living (inflation) is higher than the interest rate on your savings, your savings buy less and less over time.
Should I get a stocks and shares ISA?
If you have some disposable income, as well as an emergency fund for any immediate spending needs, and you’re willing and able to take some risk with your money, a stocks and shares ISA might be right for you.
A stocks and shares ISA is also a good way to invest tax efficiently as you don’t pay income tax or capital gains tax on investment growth or when you take money out.
However, if you have shorter-term goals or debt, or don’t want to take any risk with your money then a stocks and shares ISA is unlikely to be the right option for you.
Ultimately, you should think carefully about any investment you’re planning to make and speak to a financial adviser if you need help.