Stocks & Shares ISAs – what are the investment options?

Individual Savings Account (ISAs) allows you to shelter your savings or investments from tax, and can take the form of either a Cash ISA or a Stocks and Shares ISA.

Unlike a Stocks and Shares ISA, the value of the capital within a Cash ISA is guaranteed not to fall. This is great for investors who don’t want to place their savings at risk of falling in value. However, over the long-term this type of low-risk, low-return investment needs to be secured at an interest rate which exceeds the rate of inflation for a return to be made; otherwise the saving is making a loss in real terms.

A Stocks and Shares ISA, on the other hand, gives investors the chance for higher potential returns, by allowing investment in different types of financial assets. This greater potential comes at a cost however, as the value of investments in a stocks and shares ISA can fall as well as rise and are not guaranteed.
What are the Main Types of Investment Asset for a Stocks and Shares ISA?
Each type of financial asset has different characteristics in terms of the risk and potential returns involved. Here is an overview of the main types of financial assets often available for investment within a Stocks and Shares ISA.

Gilts and corporate bonds are issued by the government or companies as a means of raising capital. They are fixed interest stocks, which are effectively loans you make in return for interest payments. Both the level of interest and the volatility of the bond price in the market depends on the creditworthiness of the issuer.

Gilts are issued by the British Government, and are lower risk than corporate bonds but they also pay a lower rate of interest to the investor. Corporate bonds, on the other hand, are issued by companies, and therefore have differing levels of risk and potential return depending on the company concerned. The higher quality corporate bonds are known as investment grade bonds, whilst the lesser quality bonds are known as sub investment grade or ‘high yield’ bonds. In both cases, returns in the main are created from interest payments, rather than capital growth.

Corporate bonds are generally perceived to be less volatile than shares. However, given the increase in risk high yield bonds present they often behave more like shares.

A share represents partial ownership in a company for the investor, and therefore the right to share in the profits of the company, often in the form of dividends. Shares, or equities, have the potential to increase significantly in value, however their volatility means this potential return is balanced by greater risk as the value of the share is not guaranteed and will fall in value as well as rise.
What are Funds?
Funds, such as unit trusts and OEICs, allow investors to entrust the choice of underlying investments to a professional fund manager. They pool your money with that of other investors, allowing investors to spread their investments – and their risk – across dozens of different shares, bonds, gilts, or property.