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Dec 03

Help! How do I set up a self-select ISA?

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A lady called Maureen who attended one of Jasmine’s investing workshops wrote in asking for help to set up a self-select ISA. She wrote:

“I was on your investment workshop last night and it was great. Thank you. After the workshop I tried to open a stocks and shares ISA with Vanguard. It looks like they want a min of £100 per month paid in as well as a lump sum so I would probably go with someone else but I wondered if  you have anywhere on MoneyMagpie that explains the actual process of opening a stocks and shares ISA as the websites are quite complex and I’m worried about ending up with the wrong thing. I ask because I’m sure I opened a L&G one years ago with the help of your website.”

It’s quite understandable that she would ask about this.

For first timers investing your money yourself can feel scary! The word investing conjures up images of suited men shouting into telephones in their plush offices on Wall Street.

Thankfully, the reality is much simpler thanks to the internet and the number of stockbrokers offering online trading to those starting out – just like you!

However, the downside of the dizzying array of options on offer is that you will be worried about choosing the wrong thing – or struggling to set up your account at all.

But fear not, this guide will hold your hand through the process and you’ll be feeling like a market mover in no time.

 

What is investing?

woman looking confused

If you have clicked on this link then it’s likely you have at least a partial idea of the answer to this question!

Investing is simply the act of moving your money into certain products (and leaving it there) to try and make a profit. This usually involves buying stocks in a company or investing in a fund that you hope will grow in value over the time.

A ‘stock’, also called a share in the UK, is a portion of ownership in a company. If that company performs well then the value of that stock will grow over time and can be sold for a profit. This is investing – simple!

Of course, if the company performs badly, then your stock could also fall in value.

In investing you can also buy ‘funds’. These are a collection of different company stocks, sometimes chosen by a fund manager or by a computer algorithm, and bundled together for you to buy. Again if the companies held within the fund perform well, then the value of your fund will rise.

There are different types of funds with slightly different features, but we will learn more about these later.

There are also many other products you can invest in including pensions (essentially funds that you invest in within a tax-saving ‘wrapper’), gold and other commodities, property and bonds are some of the others.

 

Why invest your savings?

why ISA

Why invest? Why not just leave your money in a savings account with a high street bank and be done with it?

It’s a fair question – but luckily for you I do have the answer!

High street savings accounts are safe. Your money is secured (up to £85,000) in case something goes wrong at the bank and you can just forget about your lump sum.

However, with the top savings rate currently at such a low rate it’s like talking to yourself, and inflation running much, much higher, this means that by leaving money in an easy-access account you are actually LOSING cash each year.

In simple terms, if you put £1,000 away for a year in an easy-access savings account paying 0.75% interest, at the end of the year you will have £1,007.50. However, inflation reflects increases in the cost of living – so you would need £1,038 just to have kept up with the current rate of inflation.

Bonds, where you lock your money away where you can’t access it for a set period of time, usually pay slightly better rates (although not at the moment) – but investing gives you the chance to beat inflation.

For example, the FTSE 100, which is the name given to the 100 biggest companies in the UK, grew in value by 12.4% in the past year. Now that is inflation-beating!

 

A word of caution

Of course, investing isn’t all plain sailing. Before you get started you need to be aware of the risks.

With an easy-access savings account your money is protected in the event that your bank fails. Depending on the type of account, your interest rate is also secured so you can be safe in the knowledge that you will be left at the end of the year with a certain amount of money.

Not so with investing. The success (or failure) of your investment will depend on the success of the companies that you invest in and also the wider economy.

There is a chance that the value of your money could go down as well as up. But don’[t be put off – there are ways to lessen your risk and prime yourself for success.

There is an important investment concept to get your head around before you get started which will serve you well if you remember it: diversification.

You will have heard the saying ‘don’t put all your eggs in one basket’. Well this saying could have been designed for investors. Never invest your entire nest egg in one company. If you do and it went bankrupt, all of your money would be lost.

If you diversified by putting 10% of your money in 10 different companies, then the impact of one misstep is lessened.

Funds, as described earlier, automatically build in diversification as they are made up of a number of different companies.

Another form of diversification to consider is how much of your overall wealth to invest. You may want to keep the majority of your money in a normal savings account and only invest a small proportion. Again, that means if your investments struggled or failed, you would be comfortable knowing that the majority of your money is safe.

 

How to invest: first steps

So you know why you should consider investing and you are aware of the risks, what next?

Well you need to think about your goals. Investing is a long-term game. Markets can be volatile, meaning they go up and down frequently – but historically they have usually gained in value over time.

You need to be prepared to leave your money invested for a long time – at least five years is the usual rule of thumb.

This makes investing popular among those who are saving for retirement. In fact, if you’ve ever had a workplace pension it is likely invested in the stock market even if you didn’t realise.

Someone looking to buy a house in the next two years, say, should be very wary of investing their deposit, as a temporary dip in the market could throw off their plans. That isn’t to say they shouldn’t consider investing a small portion of their money, but you need to keep your goals in mind.

Which stockbroker and how to set up your account

If you’ve decided you want to invest and have a rough idea of your goals then you are ready to open an account. But where can you do this? And how?

There are a few different ways you can get started, but for all of them you will need a special kind of account: a stocks and shares ISA (standing for Individual Savings Account).

These allow you to invest money in funds or directly in company stocks. Payments into these accounts will count towards your overall annual Isa limit of £20,000 per tax year. You cannot put more than this into ISAs in a single year – including other types of ISA like a Lifetime ISA or regular cash ISA.

The good news is that any profit you make on your investments will be tax free if held within an ISA wrapper.

ISA platforms

There are several places you can open a stocks and shares ISA, each with their own benefits and downsides.

high street bank

Your high street bank is likely to offer a stocks and shares ISA. This can be a good option for a beginner, as if you already have an account with the bank in question then opening the Isa should be fairly straightforward.

You will also be able to check your ISA balance and your all-important investment returns in the same place as the rest of your money! However, the investment options offered by these accounts are typically very narrow. Usually you can only invest in funds and not company stocks and there will also be very little choice.

Nationwide for example, offers its savers four options based on level of risk. These are known as ‘bundles’ which are highly simplified funds made up of a proportion of stocks, bonds and cash depending on how risk-averse you are as a saver.

While this is very straightforward, you could find the lack of choice restrictive, particularly as you gain experience.

invest direct

Another option is to buy funds directly from a fund house like Vanguard or Fidelity.

These are companies which run funds directly and some offer the chance to open a stocks and shares ISA directly.

While these usually offer a little more flexibility than a high street bank, choice will still be limited as you will usually only be able to buy funds operated by that company.

The benefit is when it comes to fees. Wherever you hold your investments you will be charged a fee by the provider. These are usually fairly small but it is worth doing your research before investing as they differ depending on the provider.

There are further guides to this on this website.

If you buy funds directly, the fees will often be lower.

For example Vanguard, which runs a very popular index tracker (more on these later) called Life Strategy, charges just 0.15% in account fees. General stockbrokers fees begin at around 0.25% and there would be an additional fund charge on top.

stockbroker

The third place to open a stocks and shares ISA is via a stockbroker.

The largest of these is Hargreaves Lansdown, but other well-known options are AJ Bell and Interactive Investor. There are also more modern app-based brokers like eToro or Nutmeg.

These offer a broad choice of funds as they are not restricted to any one provider and also allow investing directly into company stocks.

However, opening an account with one of these will mean you are effectively charged twice:

  • once by the broker
  • and once by the fund provider.

However, the additional flexibility may make this worthwhile as you will have freer range to choose funds and stocks which may outperform the restricted options elsewhere.

It is also worth noting that the funds available direct from places like Vanguard or Nationwide will probably also be available via an execution-only broker (like the ones mentioned above).

You can open an account online in around 10 minutes and you will need to provide some personal information like your national insurance number, debit card details (for making an initial payment) and bank details (for withdrawing or adding money).

 

Putting in money: regular savings or lump sum

saving in an ISA

There are three ways of paying into your ISA:

  • You might choose to make a large lump sum payment
  • Pay in small regular intervals
  • Or most likely, a combination of the two.

Most platforms have a minimum amount for each type of payment. Hargreaves Lansdown for example will require at least a one-off £100 paid into the account on opening or a £25 monthly payment by direct debit.

For most investors it is beneficial to drip-feed money in, even if you have a large amount available to invest. This is because of an effect called ‘pound cost averaging’.

Because markets can be very volatile in the short term, with the value of your investments able to fluctuate quickly, paying in all of your savings at once could mean you do not get the best value for money. This is because you could accidentally buy your investments at a time when the price is high.

If you split your payments across several months the theory is it averages out and you are more likely to buy for the right price – hence ‘pound cost averaging’.

 

Choosing your funds

choosing an ISA

Once you have chosen your platform, opened an account and deposited some cash, the final step is to choose your funds.

  1. If you have chosen to go with a high street bank then you can simply make the choice based on how risky you want to be with your money. Remember, the higher the risk the higher the reward, but be prepared for the possibility that it might not pay off by diversifying your savings!
  2. If you have opted for a little more flexibility then you have three main options: stocks or two different types of funds (it is a bit more complicated than that but beginners should keep it simple!).
  3. Stocks, where you invest directly in specific companies, will come with additional charges when you make a trade. Diversification is also extra important here as you will want to protect yourself from company bankruptcies. But the rewards are potentially much higher if you can invest in a  company that flies its way to success! Plus, this approach will make you feel the most like Warren Buffett!

investing in funds

When it comes to funds (the baskets of different companies we discussed earlier) then you generally have the choice between ‘active’ and ‘passive’ funds.

  • Active funds are managed by a fund management team. They are more expensive in their fees but the theory is that by having someone looking out for your investments they are better able to analyse market movements. But they are also able to make missteps too!
  • Passive, or ‘tracker’, funds are run by a computer algorithm and aim to emulate the price movements of a particular group of companies or sectors. For example, a popular Vanguard tracker tries to recreate the performance of the FTSE 100. These are far cheaper to own, but will be unlikely to ‘beat’ the market, merely recreating its success. Still, this could well be better than a savings account.

The key thing, whatever approach you take, is to do your research. Look out for economic trends that may help you make your decisions. There is lots of information on different funds available elsewhere on this website.

 

Most of all, have fun!

This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.

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