Self-select ISAs, as their name suggests, are most appropriate for more sophisticated DIY investors who are happy to make their own investment calls.

They are ideal for more experienced investors who want maximum freedom and flexibility for their portfolio.

Most ISA investors make their choice from a limited range of collective investment funds, mostly unit trusts investing in stocks and shares and corporate bonds, or cash deposits. They effectively hand control of their money to highly-paid asset managers, trusting them to deliver the goods.
This is fine, particularly for novice investors, or those too busy to take charge of their investments. But others demand a lot more direct control, and the self-select Isa can give it to them.

Self-select ISAs free investors by allowing them to embrace a much wider choice of investments, notably individual company shares. If share-dealing is your thing, and you have the knowledge and confidence to assemble your own portfolio, then the self-select ISA allows you to shelter your gains from the taxman inside your annual £7,200 allowance.

How they work.

Self-select Isas allow you 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 (CFDs).

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.

Similarly, the thousands of investors regularly paying into employee share schemes, such as ShareSave, could reap the benefits by transferring their holdings into an ISA.

Self-select ISAs are available through traditional stockbrokers, such as Killik & Co and Barclays Stockbrokers, specialist online share-dealing firms like e*trade and TD Waterhouse, along with financial advisers, including Hargreaves Lansdown.

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

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 generally expect to pay between £10 and £15 per trade unless you are a very active trader. But these aren't the only costs, most providers also charge standing quarterly or annual fees for self-select ISAs.
The tip is, 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.

Others reduce or drop their administration charges for larger account balances, but may reintroduce them if you do not trade for some time. TD Waterhouse, for example, does not charge an administration charge for accounts of £3,600 or over, but for amounts below that it levies £30 plus VAT. If, however, you have under £5,000 and have not traded in the last quarter it will charge £10 plus VAT.

Watch out for exit charges. Many providers will charge you for each stock or equity holding you withdraw. The good news is that many sites allow you to transfer stock or funds into your self-select ISA free of charge and even refund you some of the cost of transferring in.

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, property and commodities 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 normally pay initial charges of up to 5.25 per cent. That's £52.50 for every £1,000 you invest.

But many stockbrokers discount these. 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 few others do.

Building your portfolio.

Jim Wood-Smith, head of research at Williams de Broe, says you shouldn't put money into direct equities until you have relatively large sums in your portfolio.

He points out: “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 a 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.

The Share Centre’s advice team manager Andy Parsons, says solid blue chips are a good investment for more cautious investors. He points to pharmaceutical giant GlaxoSmithKline as a lower risk holding.

Matthew Cuthbert, chairman of Killik Chartered Financial Planners, agrees and also recommends BP, Shell, BAT and Imperial Tobacco, which he says all have strong visible earnings and sold balance sheets.

For medium risk investors, Parsons singles out energy firm Aggreko, which recently reported pre-tax profit growth of 52 per cent.

At the high risk end of the spectrum, he favours Tullow Oil. He says: “Tullow is more of an exploration company than a producer of oil. Its discovery success rate in 2008 proved to be encouraging while indicating further drilling potential in 2009.”

If you are determined to go it alone, happy hunting but just remember the old adage that share prices can go up as well as down.