ISA countdown: How to invest in a self-select ISA

Monday, 18 March 2013 07:40

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What is a self select Isa?

A self-select Isa offers more choice of assets to invest in and negates the charges of a fund manager who may not provide a profit for you anyway.

If you feel that you are ready to go it alone and want to channel your knowledge into what you invest then the do-it-yourself approach may be for you.

It is the freedom to invest in what you want that attracts most people to self-select Isas but to get the most out of your investment you need to be clear on your investment strategy and how this will affect the fees you pay.

With a normal investment ISA you buy an ISA from a fund management company and invest in funds that are offered by that company.

With a self-select ISA ou are free to research and invest in the companies or funds that you decide upon and use more than one provider.

How do you set one up?

Picking the right broker is vital and to do this you need to judge how much you want to invest and how often you want to trade. The amount of trading you do will affect the fees and charges you pay for running your self-select Isa and should also inform the initial choices you make on what type of funds or share dealing platforms you use to run your self-select Isa.

Self-select Isas are available from stockbrokers and share-dealing firms and you can pick from a broad range of investments to build a portfolio that suits your needs.

Who are self-select Isas designed for?

A self-select ISA tends to suit someone with experience in investing directly or who regularly buys and sells shares. Because the investment decisions are yours to make a self-select ISA suits someone who wants to take a more hands-on approach to investing.

Finding the right self-select Isa 

There are many types of funds to choose from and a wide variety of charges depending on the type of self-select Isa you choose and how much trading to do.

Therefore, when selecting a broker or account you need to do your own research. Moneysupermarket.com is one good site for comparing charges and allows you to check the overall cost depending on how you want your funds managed and how often you want to trade.

With such an array of funds it is sensible to think about your attitude to risk before you dive in and select funds and shares for your self-select Isa. Cautious investors should aim for a well diversified fund that invests at least a third of your funds in fixed income or cash.

A medium-risk investor could consider investing in a mix of income and growth funds and western companies that are investing in emerging markets.

If you have an aggressive attitude to risk and can afford to keep your investments for a longer period you could focus more on volatile markets as you will have time to ride out the risk.

If you would like more advice and help running your Isa the Association of Private Client Investment Managers and Stockbrokers has a website that can help you find a firm to run your self-select Isa.

Trading tools

There are many free online trading tools and some allow you to practice for free so you can hone your strategy and get used to how the tools work.

Many brokers and traders allow you to run your self-select Isa yourself on a daily basis, buying and selling as you wish with free trading tools.

These allow investors to set limits on a companies’ share price that rigger when you want to buy at the low end or sell the shares when they reach a certain price.

Limit orders allow you to set a minimum or maximum price for buying or selling shares.

You can also minimise losses by setting up a stop loss which is a mechanism for selling an asset when the price drops to a certain level.

Your trading patterns

If you plan to make low-value trades, below £500 when selling blocks of shares then a standard account will be the cheapest. However, if you plan to trade shares worth £1,000 several times a month then selecting an active trader account which is likely to cost in the region of £12.50 quarterly for a management fee would be the better option.

You can buy and sell shares online, by phone or at branches or offices but buying online is now the cheapest method.

If you are likely to be a regular trader look out for free offers from online share-dealing firms including share tips and free market reports.

Bulk-buy broker options lower the cost of share dealing to as low as £1.50 a trade, however this means you are not in charge of the timing of when shares are purchased.
However, even if you select an account like this, you can still make one-off trades for a higher fee should you feel there is an excellent opportunity that you don’t want to wait for.

Read more: An introduction to ISAs

Charges

There are a number of different pricing structures depending on how you intend to run your self-select Isa.

Even though you can manage a self-select Isa yourself the charges can be higher than the cost of letting a fund manager manage your IsaA. This is because to build a diversified portfolio you need to invest in a range of products and each will have a charge of some sort.

You can expect to pay an annual management fee of between £25 and £50 or you will be charged a percentage of the total investment.

You will also pay a broker for each trade that you make and this will be in the region of £1.50 per trade if you select a bulk-buy option but can be higher or a percentage of the value of the trade, usually one per cent.

Many brokers charge a £10 dealing charge and if you make just one trade a month this still adds up to £120 a year. On an Isa worth £10,680 this is more than one per cent a year so when choosing the investment you need to assess how often you would like to trade.

Open-ended investment companies charge an annual fee of around five per cent plus a further 1.0 – 1.5 per cent charge for the management of underlying funds.

Some brokers offer a range of options for self-select Isas that reflect how often you trade and other services that you may require.

Other dealers will charge a flat fee on balances up to a certain level.

Stamp duty will also be charged by the government at 0.50 per cent of the value of any shares you purchase.

If you receive dividends on your investment you need to keep an eye out on whether your broker will charge a re-investment fee. Some do, but not all, so if you expect to receive regular dividends you should factor this in when considering charges.

Execution-only brokers have the lowest fees and these just offer an online trading platform within which you invest. However, if you are after more advice or services you can select an advisory broker who will help you select shares.

Free ISA guide: Click here

What to select?

There are some restrictions on what you can put into your self-select Isa. Companies on the London Aim smaller companies market are not eligible and some foreign shares that are not recognised by HMRC as being on an official stock exchange are also out of bounds. You are also not allowed to trade foreign currencies within an Isa so to do this you will have to convert them to sterling which can become expensive.

Exchange-traded funds (ETFs) can be selected and investment trusts too but although bonds are eligible they must have more than five years left of maturity. This is in part because the government set Isas up as a tax-free saving vehicle not as a method for trying to make quick bucks.

You can select cash to include in a self-select Isa but remember you will be paid a low rate of interest on cash that you hold, so a cash Isa is more suitable for holding cash. However, if for instance you have sold shares and want to hold the cash while you decide where to re-invest you can hold the funds in your self-select Isa.

Transfers

Most people already have a cash or investment Isa so the chances are that you may want to transfer in funds. This is a fairly simple process and will involve you contacting your new self-select broker and complete a transfer form listing the Isas that you want to transfer in and the broker will contact your previous providers and request a transfer.

However, the funds that you are transferring in have to be available from the new provider or you will need to sell them and invest in other funds or shares. Some brokers or managers charge for transferring funds but not all.

The process can take longer than for transferring balances from one cash Isa to another so you need to allow around six weeks for this process. Once this has been done it should be easier to manage all of your Isa investments in one place

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