Is a stock market fall good or bad for an ISA?

Christopher Ruane ponders the question of what a stock market fall could mean for his Stocks and Shares ISA.

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Whenever there is a stock market fall, some headlines appear that are filled with doom and gloom. But as a buy-and-hold investor, what might a stock market fall mean for my Stocks and Shares ISA?

How a stock market fall can hurt my ISA

The most obvious way in which a fall can dent my ISA is by reducing the value of the shares I own in it. For example, the rise in oil prices and concern about passenger demand has hurt investor sentiment towards British Airways owner IAG lately.  Its shares have fallen 35% in a year. So if I had used £1,000 in my ISA a year ago to buy IAG shares, I would now see them valued at around £650.

That sounds like bad news – the point of investing in a Stocks and Shares ISA is to make money, not lose it. But in fact, I would not have lost any money on my IAG investment yet unless I had sold the shares. A stock market fall can hurt the value of my ISA, but that is only a paper loss until I stop owning the shares (normally because I sell them, but occasionally because they stop trading). That can happen – the recent bid for Stagecoach, for example, takes advantage of a fall in the bus operator’s share price. If the bid is successful, I will effectively be forced to sell my Stagecoach shares for less than I paid for them.

But a share price fall on its own does not mean I have lost money, if I still own the shares. Their price may recover in future, after all.

Stock market fall and business performance

There is another way a stock market fall can hurt my ISA value, even if I do not sell any shares.

Some falls directly damage the business performance of certain types of company. It can lead to people withdrawing funds from their investments, for example. So it could hurt profits at investment managers such as Schroders or abrdn. The opposite could also be true, though. Falling share prices might lead to more market activity, pushing up revenues and profits for investment firms.

How a stock market fall can help my ISA

The most obvious way a a drop could boost my ISA is by offering me a buying opportunity. Buying  quality companies on the cheap could offer me significantly better returns in my ISA over the long term.

But there is an important caveat here. The buying opportunity is not about me purchasing shares just because they are cheaper than before. A share that has fallen can keep falling – sometimes until it is totally worthless. Instead, I would be looking for a buying opportunity where businesses I already find attractive become available at what I think is an attractive share price.

Boosting my passive income streams

Buying great companies at good prices can also help my ISA returns by boosting the dividend yield I earn.

If a share falls in price, the yield (percentage of my purchase price) from its dividend is higher. So a stock market fall is a chance for me to buy more shares in companies I already own, but at prices that can offer me a higher dividend yield than before.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Christopher Ruane owns shares in abrdn. The Motley Fool UK has recommended Schroders (Non-Voting). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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