Stocks and shares ISA risks?

A reader from Rutland wants to know about the ISA risks.

Andrew Norton, Halifax and Bank of Scotland investments expert, tackles the problem.

Dave from Rutland asks:

I'm debating opening a stocks and shares ISA for the first time. What are the risks involved?

Andrew replies

When you invest in shares, you accept a risk to your capital in exchange for potentially higher returns.

It's worth noting that what is acceptable to one person may be sheer recklessness to another.

The more companies you invest in, the more you spread the risk.

If you were to invest equally in shares in four companies and one of them did particularly badly, that would adversely affect 25 per cent of your money.

If, on the other hand, you had invested in a fund that covered 100 companies equally, the poor performer would only affect one per cent of your investment.

Conversely, investing in a smaller number of companies means you benefit more when they do well and if you invest in a large number of companies you don't benefit as much.

Likewise, by limiting your investment to a single industry sector, say telecommunications, or geographical region, say the Far East, your returns will grow quickly when those areas are booming, but will also feel the negative effects of any economic downturn more quickly.

Variations in exchange rates will also have an impact on the returns on your investment.

You can also place some of your money in funds that invest in cash, corporate bonds and property to add balance to your portfolio.

Sensible investing is all about setting the amount of risk you are prepared to accept.

That's why most providers offer different products that enable you to adjust your exposure according to how cautious or adventurous an investor you are.

If you have a question for Andrew, go to the myfinances.co.uk Ask the Investments Expert section

Or for more information on your investment options go to investments at Halifax