If you're new to investing, it's hard to know what to expect. Here we outline some of the key things to consider before you open a stocks and shares ISA.
Can you make money from investing?
Yes, you can aim to make money from investing.
However, investments fall as well as rise in value, and you could get back less money than you put in.
This makes investing less predictable than savings, and you do not know what the rate of return on your investments will be in advance.
Savings accounts show you the interest rate beforehand, so it's easy to know how much your money will grow. However, depending on the type of account, the interest rate could change over time.
Can you lose money by investing?
In short, yes. By nature, investments can rise or fall in value. So, just as you can make money through investing, you’re also at risk of making a loss. This is why investing is riskier than saving.
What about savings accounts?
Savings accounts grow your money slowly but steadily. So, they’re a safer option than investing, but don’t have as much potential as investments. You can choose from fixed or variable interest savings. If you go for fixed, your rate is guaranteed regardless of market conditions. Variable interest goes up and down in line with the Bank of England base rate. It’s impacted by inflation – the rate prices increase over time. No one knows how quickly living costs will increase. If your savings don’t keep up with inflation, your money won’t stretch as far.
Can you minimise the risk of investing?
One way to lower your risk level, and diversify your investment, is to spread your money across different asset classes such as shares, money market instruments, bonds and property.
If you put too much money into one company or industry, then you run a higher risk of losing some of your money.
Will I pay tax on my investment profits?
Any profits in an ISA are free from capital gains and income tax.
You won't pay any Income or Capital Gains Tax on any profits you make from the money held in an ISA. However, there is a limit to how much money you can contribute to your ISAs. For the 2023/2024 tax year, your ISA allowance is £20,000. Tax rules are subject to change and are dependant on individual circumstances.