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Stocks & Shares ISA risk?

henrygregory
Posts: 567 Forumite


Hi, I am tempted to invest in a stocks and shares ISA but wanted to find out more about risk. All of the adverts show about the potential tax free returns etc, but dont mention anything about risk. What would happen if the stocks invested in don't do well or companies invested in go bust?
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Comments
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henrygregory wrote: »What would happen if the stocks invested in don't do well or companies invested in go bust?
You would lose money. That's the risk.
However, most people invest in funds rather than individual stocks. These are baskets of companies so even if one was to go bust then you haven't lost all of your money. Spreading your investments across different companies and sectors reduces the risk of a big loss of capital.
You just need to understand what risk is. No savings or investment product is totally risk free. Keep money in cash and you could lose money due to inflation. Keep it in a box under the bed and your house could burn down.
For most people, the risk that you could lose money over the long term (20 years or more) is less than the chance of stock investments beating cash over the same period.0 -
You'd lose some/all of your money. The value of investments can go down as well as up.0
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henrygregory wrote: »Hi, I am tempted to invest in a stocks and shares ISA but wanted to find out more about risk. All of the adverts show about the potential tax free returns etc, but dont mention anything about risk.
They don't mention risk as it is totally dependent on what you put inside the S&S ISA.
The S&S ISA is purely a wrapper, what you buy inside that wrapper is entirely down to you. So you could have low risk bonds or at the other end of the scale high risk small company shares - the choice is yours.henrygregory wrote: »What would happen if the stocks invested in don't do well or companies invested in go bust?
If the companies go bust then you would generally lose all your money.
But having a single share inside an ISA as your only holding would be an incredibly risky and in my view, an exceptionally stupid thing to do.
It is far more sensible to have a balanced portfolio either using funds which invest in many shares or owning a mix of shares directly yourself. In that situation then a single company going bust would have little effect on your overall position as it would be less than say 1/20th of your portfolio or in the case of a fund potentially much less than that.
I don't hold any shares directly in my S&S ISAs, I purely hold a mix of funds, some index trackers and some managed funds in various sectors and parts of the world to give a balance. Not all regions go up and down at the same time which gives even more diversification on the portfolio.Remember the saying: if it looks too good to be true it almost certainly is.0 -
In most cases, the risks are pretty much the same as investing in shares outside of an ISA wrapper. The risks can be mitigated somewhat by choosing a share tracker fund of some kind, which invests in many companies at the same time. A FTSE all-share tracker for example. Investing in individual companies is much too risky for my taste.
Even so, a stocks and shares ISA should probably only be considered as a long-term investment (at least 5 years), to allow some time for the short-term volatility of shares to be smoothed out, and the likely (but not guaranteed) above-inflation gains to be realised.0 -
In most cases, the risks are pretty much the same as investing in shares outside of an ISA wrapper. The risks can be mitigated somewhat by choosing a share tracker fund of some kind, which invests in many companies at the same time. A FTSE all-share tracker for example. Investing in individual companies is much too risky for my taste.
Even so, a stocks and shares ISA should probably only be considered as a long-term investment (at least 5 years), to allow some time for the short-term volatility of shares to be smoothed out, and the likely (but not guaranteed) above-inflation gains to be realised.
I would be nervous abou suggesting that a tracker is safer than any other fund. Many non-trackers are much less volatile than any equity index fund. If the underlying index is unbalanced then problems in a specific sector can cause excessive falls - look at the banks and the FTSE100.0
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