If you are looking to invest, opening a Stocks and Shares ISA can protect your returns from the taxman. But is there a danger of losing all your money?
What is a Stocks and Shares ISA?
Before determining the likelihood of losing your money, it’s important to understand what a Stocks and Shares ISA actually is.
A Stocks and Shares ISA allows you to invest money and not pay any dividend, income or capital gains tax on your returns. This allows you to legally access your profits tax free.
The amount you can invest into this type of ISA is limited by what’s known as the ISA allowance. For the 2021/22 tax year – which runs from 6 April 2021 to 5 April 2022 – the ISA allowance is £20,000.
Do note that this allowance covers all ISA accounts. For example, if you save £5,000 into a Cash ISA, you’ll only be able to invest £15,000 into a Stocks and Shares ISA during the same tax year. Allowances renew every year, but if you don’t use your allowance, you lose it.
For the full lowdown, see our article on how Stocks and Shares ISAs work.
What can I invest in with a Stocks and Shares ISA?
With this type of ISA, you can choose to invest in either bonds, shares or funds.
A bond is essentially a loan to a company or the government. A share is a stake in an individual company. A fund is a collection of both, merged into a single investment.
If you are looking to open a Stocks and Shares ISA, you may wish to choose a platform from which to buy your investments. A share dealing account offers a low-cost way of buying and holding your investments.
New to investing? It’s a good idea to read the basics of investing.
Can I lose all my money in a Stocks and Shares ISA?
Any investment can go down as well as up, so yes, you can lose money in a Stocks and Shares ISA. However, while horrendous market crashes do happen, it’s unlikely that you’d lose everything – especially if you have a diversified portfolio.
If you want to invest, it’s sensible to take a long-term approach, as this should enable you to ride out any short-term swings in the stock market.
Taking a long-term approach means you’ll also be less likely to crystallise losses. This is especially true if you’d struggle to handle the phycological impact of seeing the value of your investments plummet.
As a rule of thumb, the younger you are, the longer you should plan to invest for. That’s because, by definition, younger people have longer to recover from any future crashes.
For more on how long you should invest for and how to determine your personal appetite for risk, see our article offering five ways to avoid losing money in the stock market.
Would I be better off with a Cash ISA instead?
The key thing to note here is that investments typically beat inflation. Savings in a Cash ISA – especially in the current low-interest environment – almost certainly won’t.
Yet investments carry risk and if you have little appetite for losing money, or you want access to your savings in the near future, a savings account may be a better option.
