How they work.

Self-select Isas allow you to to invest in thousands of UK and international equities, collective funds such as unit trusts, open-ended investment companies (Oeics), investment trusts, corporate bond funds and exchange traded funds (ETFs), gilts and cash, and even more complex financial instruments such as warrants, covered warrants and contracts for difference (CDFs).

If you are sitting on thousands of pounds in windfall shares from a building society or insurance company demutualisation, or you invested in one of the privatisations such as BT or British Airways, you should consider moving them inside a self-select Isa, for more tax-efficient returns.

Intrepid investors looking to put their money into start-up companies may be disappointed to learn you can only use a self-select Isa to invest in quoted shares, which excludes unquoted OFEX and AIM-listed shares.

There is one exception to this rule – employee share schemes. Terry Wyatt, Isa specialist at American Express Investments, says thousands of employees currently holding equities in ShareSave and Share Option Schemes could reap the benefits by transferring their holdings into an Isa. "There's no buying or selling involved and it doesn't cost you a penny. This way, even employee shares in non-listed companies can be held within the Isa wrapper."

Self-select Isas are generally sold by stockbrokers, including American Express Investments, Barclays Stockbrokers, Comdirect, Halifax Share Dealing, Hoodlees Brennan, Etrade, FasTrade, iDealing, Killik & Co, NatWest Stockbrokers, The Share Centre and TD Waterhouse.

Most are execution-only services, which means they don't offer advice, but merely execute your chosen deal. The likes of Killik & Co will let you discuss your stock choices with a broker, for an additional fee.

Online financial services directory Find.co.uk contains a list of dozens more online brokers.

You can't buy a self-select Isa from a fund supermarkets such as Cofunds and Fidelity FundsNetwork. Fidelity sells around 900 collective investment funds, mostly unit trusts, from 56 leading asset managers, but it doesn't offer direct equity investment.

Fund supermarkets deliver enough choice for most investors, but self-select Isas offer much more. American Express Investments, for example, offers access to more than 12,000 direct equities in 10 global stock markets, as well as 800 funds from 32 different managers.

There's another thing fund supermarkets tend to omit – investment trusts. These are collective investment funds that are traded on the equity markets like stocks and shares, which means you can buy them within a self-select Isa. They have lower charges than unit trusts and can outperform in the right market conditions, and appeal to more experienced investors.

When setting up your self-select Isa, you have two choices. A maxi Isa, which allows you to shelter your fall allowance of £7,000 a year from the taxman, or a mini self-select Isa, sheltering £3,000 worth of stocks and shares - #4,000 from April 6 2005.

You can then save another £3,000 free of tax in a mini cash Isa, available from your bank or building society. Many Isas will appeal to more cautious investors, who don't want to expose all their money to the stock market.

Minimum investment limits on self-select Isas vary, but can be quite low. Stockbroker TD Waterhouse, for example, allows you to invest in its mini or maxi self-select Isa from just £500.

Share trading costs.

Most brokers allow you to trade shares and funds online at real-time prices, with immediate confirmation during office hours. Many also give you access to fund and equity research, and allow you to view your account valuation, information and history 24-hours a day.

Sites also offer special dealing features such as stop-loss triggers, a safety net that sells your share immediately it falls below a certain level, or purchase price limits, which automatically buys a share once the price hits your target level.

Because you are making the stock choices and completing the deal yourself online, you can trade at minimal costs.

Charges vary but you can expect to pay between £10 and £15 per trade. But these aren't the only costs, most sites also charge standing quarterly or annual fees for self-select Isas.

Your choice will depend on how often you plan to trade shares, and the amount of money you deal each time, says Chris Gilchrist, editorial director of financial publishers Every Investor. "If you trade regularly look for higher standing charges but lower dealing costs, but if you expect to adjust your portfolio just once or twice a year choose higher dealing costs and lower standing charges."

Some sites even charge less than £10 per trade – The Share Centre charges £7.50 on deals up to £10,000 on its self-select Isa. But it also has a relatively expensive annual fee of £75. This makes it more attractive to regular traders.

Comdirect, by contrast, charges left a flat £12.50 per trade, but its annual fee is just £25, regardless of how many years worth of Isas you hold in the account. This may appeal to those who trade infrequently.

Some stockbrokers charge administration fees as a percentage of your portfolio rather than a flat fee. Barclays Stockbrokers imposes a half-yearly admin charge of 0.25 per cent. That's £17.50 every six months for somebody holding £7,000 – £35 a year. Minimum six-monthly charge is £10 and maximum £60, so investors with larger sums could pay £120 a year.

Barclays charges £12 per trade for online dealing, but that falls to £7.50 if you deal more than 10 times in a quarter. As with many broker sites, its telephone dealing costs are more expensive. You pay £17.50 for deals up to £1,000, £24 up to £2,000, rising steadily to £75 for deals over £20,000.

Watch out for exit charges. TD Waterhouse, for example, charges £10 for each stock or equity holding you withdraw, and most other websites have similar charges. The good news is that many sites allow you to transfer stock or funds into your self-select Isa free of charge.

Some will even cover any exit charges you paid when transferring stock from a rival broker. iDealing.com, for example, pays £10 for each stock you transfer (provided its worth more than £1,000) up to a maximum of £150, American Express refunds transfer costs up to £100.

Remember, you must also pay 0.5 per cent stamp duty on every share deal, whichever site you are trading on.

Investment funds.

Most stockbrokers also give you discounts if you buy collective investment funds for your self-select Isa.

Brokers' typically offer a choice of investment funds covering major stock markets such as the UK, US, Europe and Far East, plus corporate bonds, cash and even property funds. They strike deals with dozens of assets managers to sell their funds with discounted initial charges.

If you buy direct from the asset management company, either inside or outside an Isa, you will pay initial charges of up to 5.25 per cent. That's £52.50 for every £1,000 you invest, or £376.50 for your annual £7,000 Isa allowance.

But many stockbrokers discount these on a limited range of funds, if you buy within their self-select Isa. Barclays, for example, cuts initial charges to just 1.5 per cent. Others may offer even more attractive discounts discounts.

If you are investing primarily in funds rather than direct equities, IFAs Hargreaves Lansdown's Vantage offering could prove attractive. This is a halfway house between a fund supermarkets and self-select Isa, allowing you to invest deal online in direct equities and a huge range of investment funds.

Whereas most supermarkets offer around 900 funds, Vantage sells around 4,000, with initial discounts on more than 1,000. Initial fund charges are cut to as low as 0.25 per cent, and Vantage also offers a 0.25 per cent rebate on the annual charges on those funds, something no similar offering does.

But you may be able to find lower dealing charges elsewhere, depending on your trading patterns. Hargreaves Lansdown charges 1 per cent per trade (minimum £10, maximum £50) plus a 0.5 per cent annual charge, for both online and telephone deals.

The tax benefits.

Chancellor Gordon Brown has chipped away at the tax benefits of investing in Isas, and, sadly, they're simply not as tax-efficient as they used to be.

The main benefit is that you don't pay any capital gains tax (CGT) on your investment returns. This is charged at 40 per cent on capital gains above £8,200 (2004/05 financial year). Neil Thomas, director of IFAs Simpsons of Brighton, says most investors can escape CGT even on holdings held outside an Isa, by spreading any gains over several years. "But if you have larger sums, it's still worth keeping the money in an Isa, just in case."

But the income tax advantages of Isas have been greatly eroded, particularly for basic-rate taxpayers.

Equity dividends used to attract a 20 per cent tax credit within Isas, but that was halved to 10 per cent then done away with altogether in April 2004. This hits dividends paid both by individual companies and collective equity income funds.

This means that basic rate taxpayers no longer enjoy any immediate income tax advantages to investing in stocks and shares Isas, says Justin Modray, investment adviser at IFAs Bestinvest. "It may still be worth investing inside an Isa wrapper, because if you become a higher-rate taxpayer at a later date, your investments will be sheltered from income tax."

Higher-rate taxpayers pay an extra 22.5 per cent income tax on dividends held outside an Isa, so they have a clear incentive to use Isas. "You also don't have to declare income on your self-assessment tax form. This means when you take income from your Isas, typically in retirement, it won't count towards your age-related personal tax allowances, reducing your overall tax bill."

Modray says tax issues are particularly important for self-select Isas, because you pay an additional fee for the Isa wrapper, anything from £25 to £120. "For basic rate taxpayers, this charge wipes out the income tax benefits of investing in a self-select Isa. These fees are only justified if you are likely to pay higher-rate income tax or CGT in future."

Building your portfolio.

Jim Wood-Smith, stockbroker with Barclays Private Clients, says you shouldn't put money into direct equities until you have relatively large sums in your portfolio, typically at least £50,000. "Individual stocks and shares are more volatile than collective funds, because you are invested in one company rather than dozens or even hundreds, and are therefore only for more experienced investors."

He has point, but there's nothing to stop you using a self-select Isa to test the water, and see whether share trading is really for you. But don't invest money you are likely to need in a hurry, or simply can't afford to lose, because equities are a gamble, and they won't always pay off.

Patrick Connelly, investment specialist with John Scott & Partners, says investors should build their Isa portfolio carefully, starting off with solid holdings such as cash, before moving into relatively lower-risk funds investing in a spread of solid blue-chip UK equities. Thereafter, spread your wings into the Europe and US. "Once you have a solid, diversified core portfolio, you can start taking more risks by investing in individual company stocks, in the hope of generating higher returns."

A self-select Isa is a tax-efficient way of taking that final investment step, but remember, they're not for everybody.