Where and how to Investing in Germany

This is a second part of the Complete guide to Investing in Germany. In Part I, the basics of investing in general was discussed. In this section we will look at the  basics of investing in Germany.

Table Of Contents

Investing in Germany

Investing in Germany is the same as other countries. However, due to the language, the terms used are different. The below explains the German terms and its English translation of what you will need to know before you start to invest in Germany.

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Where to invest in Germany

The different types of financial instruments in which can be invested in. This lists only the basic types of financial instruments which is commonly used as investments. The list does not include derivatives or other instruments.

  • Aktien : Stocks representing the shares of a company. This could be an aktien of BMW or Seimens or other companies.
  • Fonds : Funds or also called Mutual funds, as explained earlier, is a instrument where a manager invests the money which is pooled in by many investors.
  • ETF / Indexfonds : The Exchange traded funds or index funds (Indexfonds) which track a particular index.

Types of Fonds

So, more German terms you might come across when selecting your investment funds:

  • Equity Funds (Aktienfonds): Funds that invest at least 51% of its money in stocks/shares), ETF’s also count as Aktienfonds
  • Balanced Funds (Mischfonds ): Fund that invests at least 25% of its money in stocks/shares)
  • Real Estate Investment Funds (Immobilienfonds): Funds that invest at least 51% of its money in real estate, or in companies that only own real estate
  • Bond Funds (Rentenfonds): Fund that invests in bonds. Since bonds guarantee a fixed income, and cannot lose value as rapidly as an equity fund, this is desirable for pensioners.
  • Money Market Funds (Geldmarktfonds): Fund that invests in fixed-term deposits and bonds, all of which will come due in less than 12 months.

How to invest in Germany

So, what do you need to open to start investing in Germany? The two important things you need before you can start investing is a

  • Broker: A brokerage institution which acts as an intermediary between you and the exchange. Normally, any Broker is alright as long as they. It is prefered that you select a German broker since they know the German regulations and provide annual statements which are useful when filing your tax returns.
  • Depot: Is a depository account with an institution where your financial instruments such as stocks, ETF, Funds etc., are deposited. It is also called a securities deposit account (Werpapierdepotkonto).

In Germany, usually, the brokerage house will also provide the depository account. Therefore, all you will hear of is about a Depository account (Depot or Depotkonto).  So all you will need to start investing in Germany is a Depotkonto.

How to select a Depotkonto

There are two types of depotkonto providers in Germany:

  1. Depotkonto with a Bank
  2. Depotkonto with Discount brokers

1. Depotkonto with a Bank

Banks such as Comdirect, DKB, Commerzbank, DAB, etc, provide a depotkonto.

Advantages of depotkonto with a Bank is that it is a part of other services from your bank, therefore, you can have a normal bank account and also a depotkonto (deposit account). It provides you with a single access point to maintain all your accounts. You also do not need to make an advance deposit since it will be automatically withdrawn from your bank account.

The disadvantages of depotkonto with a bank is that they usually charge high transaction costs. Some banks also provide for a some kind of savings plan (sparplan) with regular monthly investment without charges (explained below).

2. Depotkonto with Discount brokers

Examples of such discount brokers are as Bankx,  OnVista, Flatex, Captrader, etc.

Advantages of depotkonto with a discount broker is that they usually have low transaction costs. This is useful for those who wish to trade frequently in stocks and shares, which is not recommended for a beginner. However, if you want to invest directly in a company and know what stock to buy, then you can use the Discount brokers.

However, the disadvantage is that since it is not linked to your bank, you will have to maintain a deposit in your brokerage account in case you need to make any purchases. Also, when you sell, the money will have to transferred into your bank account, which will take transaction time of a day or two.

Costs and charges for Depotkonto

In a long run, various costs and charges make a significant difference when selecting between a good depotkonto and a bad depotkonto. The different costs associated with a depotkonto are listed below:

Depotführung : Maintainance charges for the depotkonto (Deposit account). This depends on the total value of your securities in your deposit account and may be charged monthly or annually. Almost all the accounts now offer a free deposit account (Kostenlose Depotführung) without any maintenance charges. So make sure you select an account which does not incur this cost. There may be certain conditions associated with giving a free deposit account. For example, if you maintain a bank account with Comdirect or a savings plan, the deposit account is free.

Ordergebühren: Order fees for each transaction order to buy or sell and is also called Kosten pro Order (cost per order). This cost is charged per order and may also depends on the size of the order (total value of purchase). It might be a fixed cost or a percentage value such as 0.25% of the total value, subject to a minimum value. It also depends on whether you are using a foreign stock exchange (NYSE, London) or a German stock exchange (Frankfurt) to make your purchases.

Ausgabeaufschlag : Commission charges or load fees. Some brokers earn a commission or provision for the sale of certain funds. This is deducted from the load fees paid by the investor. Sometimes, such commissions can go as high as 5% which is added to purchase value. Some brokers cancel or give a discount on these charges if for Sparpläne (savings plan).

Selecting the right depotkonto depends on your requirements and what kinds of investments you will make. So if you are a beginner in investing, or if you are not sure about investing in Germany, then you should rather select a broker with allows you to invest in a fund or ETF’s with the low costs.  This can be done through a depot using a free Sparpläne (savings plan).

What is a FondsSparpläne (Funds savings plan)?

The best way to invest is by regular investing in a savings plan. This will also give you the benefit of cost averaging.

As the name signifies, by using a saving plan invests you can invest a fixed sum of money each month (at a particular date) into a particular fund. The fund could either be a normal mutual fund or an ETF or Index fund.  Depending on the value of the fund on the day for which you have signed up for, a certain number of units (or fractions thereof) are purchased. The sparplan can be started for as low as 25 euro investment per month.

If you plan to make a small number of regular monthly investments into Funds or ETF’s, then selecting a depotkonto which provide savings plan without any transaction charges makes sense.

Depotkonto Recommendations

Since the article is also designed to be a simple guide for a beginner into investing in Germany, here are the top two recommendations for a depotkonto in Germany. For a more detailed analysis of various depotkonto (deposit account)  in Germany including their costs, check the calculator below.

If you are planning to start investing in a savings plan, which is recommended for a start, the two most recommended depotkonto in Germany are:

Comdirect Depot

Comdirect-Logo.svg

  • Free deposit account without any maintenance charges if you have a savings plan or a bank account with Comdirect.
  • Choice of 75 funds to select from for Sparpläne- also includes ETF’s of major Index fonds
  • No transaction charges or commission for purchases using sparplan
  • Savings plan for as little as 25 Euros a month.

Click here to learn more about Comdirect Depot

DKB -Broker

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  • Free deposit account without any maintenance charges
  • Choice of 1500 funds to select from for Sparpläne
  • No transaction charges or commission using sparplan (on free list)
  • Fixed transaction cost of 1.5 EUR for Sparplan (not on free list)
  • Savings plan for as little as 50 Euros a month.

Click here to learn more about DKB-Broker

Detailed comparison of the Depot accounts in Germany