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Shares Isas: how to pick the best

Shares make you more money long-term

You can put up to £7,200 into an equities ISA each tax year.
Equities (shares) are better than cash investments long-term. You can put your money into a cheap, simple index tracker, or an ETF, or individual shares that you choose or a managed fund.
Get some free brochures on shares-based investment funds here.

Shares Isas are tax-saving products available to any UK resident aged 16 or over. They're basically investments in the stock market that you don't pay tax on. Remember, Isas aren't investments in themselves. They’re just 'wrappers' that protect your savings from tax. Putting money in a shares Isa is just the same as putting money in any stock market investment (like a fund or shares in an individual company) but you 'wrap' it in a tax-saving 'bag' so that when your investment grows you don't lose any of it in nasty tax payments.

You can put up to £7,200 in a shares Isa each financial year (that's 6 April to 5 April). Once you put the money in you can take it out again, but once you take it out you can't put it back in the Isa during the same year, or open up another one. Once the money is in the Isa though, you can transfer it directly into another Isa with another company if you want to, without making any difference to your annual allowance.

Should I have one?

Probably, yes. If you are investing for the long-term then certainly. Although in the short-term (i.e. under five years) the stock market can go up and down wildly, in the long-term it just goes up (in a wiggly line). In fact, it goes up at such a rate that you make much more money with your investment than you would if you just kept it in a savings account.

Really, Isas should be used for long-term investing, such as your retirement fund. That's what they were brought in for originally - to boost our savings for our old age - and that's why we are allowed to put the full £7,200 into shares-based Isas, as opposed to cash Isas where you are limited to £3,600. The government is trying to encourage us to put money away for our retirements because they know that we're not investing enough right now. It also knows that, long-term, shares investments give a much better return than cash investments. That's why it's given us more incentive to invest in equities than in savings accounts.

Which are the best?

It's hard to recommend the best actual equities investments because you don't have a lot to go on other than past performance and your knowledge of funds and companies. With cash investments (savings accounts) it's easy because you have a number to compare - they say how much interest they will be paying, at least for the next six months or the next year - and you can compare that with other accounts. With equities all you have to go on is how well the product has done in the past few years, how well the company has done generally and what the annual charges are (generally the lower the charges, the better the investment does long term). But none of those elements can tell you definitely which will perform the best this year, next year and in following years.

However, there are some types of equities investments that generally do well and are easy to invest in. Here is a run-down of the investments we think you should consider:

Index-tracking Funds

We like index-tracking (tracker) funds because they're simple, cheap, easy-to-understand, and they work. You can find out a lot more about them in our article about index trackers here, but basically they work by putting a small amount of your money into every single company in the index you are tracking. So, for example, they might put a bit of money into every company in the FTSE 100, if that is what you are tracking, or every single company in the FTSE All Share index, or the FTSE 250, or even one of the foreign stock indices such as the DAX in Germany or the Dow Jones in America.

They work by computer, and computers don't need payment so these funds are cheap. In fact it's rare to find a tracker fund that charges more than 1% a year to manage your money, which is a good rate. The management fees you are charged each year have a direct effect on how well your investment does - i.e. the lower the charges, generally, the more money you make because less is being taken out of your fund each year. So this fact alone makes trackers appealing.

Tracker funds are also easy to invest in. Quite a few companies offer them (see the list below). Also, their trackers come 'pre-wrapped' in an Isa which makes it even easier to buy. By the way, if you're wondering what a FTSE is, see our article about it here.

Exchange-traded funds (ETFs)

These are, again, quite cheap and effective. In fact, they work a bit like trackers and their charges are very low, usually less than 0.5%. Also, you don't have to pay stamp duty on them. See our article about ETFs here for more information.

ETFs also come pre-wrapped in an ISA which makes it easier to buy them. To get an ETF, though, you need to go through a broker. We suggest TD Waterhouse as a cheap, online broker.

Managed Funds

Some managed funds (that is funds that are actually 'managed' by real people rather than a computer) do well - sometimes very well. But, sadly, the majority of them don't. In fact about 85% of funds that are managed by the guys in the city under perform compared to the stock market. Not only that, but you are often charged a lot!

However, if you find a fund that has been well run by a really good fund manager, you can make great profits. We have some free brochures here that you can read to see what you think of the performance of a few of the funds. You can also see how various funds have performed on the website Moneyspider which tracks them. It's an independent service that tracks the performance of hundreds of funds, so you can see how each one compares with the others.

When you are choosing a managed fund remember that the annual fees are very important. Try to avoid ones with higher fees unless they have an exceptional track record. Also, there are some 'star' fund managers whose funds have consistently outperformed the stock market, and their funds are generally worth considering. Finally though, remember that even if a fund has performed well in the past, that doesn't guarantee that it will continue to do so in the future. You will need to monitor it once a year or so to make sure that it is still worth investing in.

Individual shares

Entire libraries are filled with books about how to invest in shares. There are several different theories about how best to make money through shares, and some people spend a lifetime trying. Others, like multi-billionaire Warren Buffett, spend a lifetime amassing a fortune through shares.

Essentially, if you would like to invest in individual companies rather than just funds, you will need to spend some time studying the market, studying books on investment and keeping an eye on the companies you put money into. In other words, it's not an easy ride. If you just buy shares in a company because your friend says it's good or a bloke down the pub gave you a tip off you are likely to lose your money. People who consistently make money by investing in individual companies are those who work at it and follow investing rules rather than their own whims.

So if you want to look into this, get reading and studying. We like the book The Naked Trader by successful investor Robbie Burns. He also recommends other works on investing in the book. Also check out investment websites such as the The Motley Fool and Interactive Investor.

If you do the work and decide on a company you want to buy into, you will need to make the transaction through a stockbroker. Happily, that doesn't have to cost you much now that there are online stockbrokers that anyone can use. Just sign up to one, like TDWaterhouse, and you will only have to pay £9.95 per trade.