Investing in the stock market with a Stocks and Shares ISA has never been simpler, or cheaper, than it is today. Online share-dealing has helped make Stocks and Shares ISAs more accessible to a broader range of people. It has also encouraged competition in the sector.
Online brokers are fighting over each other to offer investors the best deal. Some have even eliminated trading commissions. However, despite these positive developments, these products are still relatively underutilised.
According to figures published by HM Revenue and Customs, around 8m people opened Cash ISAs in the 2017-2018 tax year. Meanwhile, only 2m people opened Stocks and Shares ISAs.
Today, I’m going to explain why I believe Stocks and Shares ISAs offer a much better proposition for long term investors, and why I’m investing £250 a month in one of these tax-efficient savings accounts in 2020.
The best flexible Cash ISA interest rates on the market at the moment is just 1.31%. However, over the past three decades, the FTSE 100 has produced an average annual return of 9%, including dividends. This suggests investors would be much better off buying the FTSE 100 if they’re investing for the long term.
You can only do this with a Stocks and Shares ISA. Most Cash ISA products restrict where you can invest and the rates of return you can earn on your money.
Stocks and Shares ISAs also allow you to invest your money around the world. Most online stock brokers now give investors access to international stock markets. The ISA rules state that an investor can own any publicly-traded security as it’s traded on a ‘recognised stock exchange‘. This means most international developed markets qualify, as well as a handful of emerging market exchanges.
So, if you are worried about the state of the UK economy post-Brexit, investing internationally via a Stocks and Shares ISA will help you diversify and benefit from international growth.
Owning stocks also gives you access to dividend income. Investing in dividend stocks can be a great way to create a passive income stream.
The London market currently supports an average dividend yield of 3.5%. That means there’s an annual income of £3.50 available for every £100 invested. However, some stocks offer a much higher level of income. There are a handful of FTSE 100 stocks, for example, that support dividend yields of more than 5%.
By comparison to the lowly interest rates Cash ISAs offer, these dividend yields look extremely attractive. And, as mentioned above, there’s no need to stick with UK-based dividend stocks either. A Stocks and Shares ISA allows you to invest in income investments from around the world.
Therefore, if you’re serious about saving for the future, and want to make your money work as hard as possible, a Stocks and Shares ISA should be part of your long-term saving strategy.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.