What Costs Are Involved in Investing? Taxes, Fees, and More

Investing isn’t just about generating returns—you also need to keep an eye on the various costs that can eat into your profits. From account fees to transaction costs and taxes, many factors can affect your net returns.

This article covers the different costs of investing, key tax considerations, and tips on minimizing investment costs to maximize your returns.

The Key Cost Factors in Investing

Investing isn’t free. Every investment type, whether stocks, ETFs, or funds, comes with different fees and costs. It’s crucial to keep these costs in mind, as they can impact your overall returns in the long run.

Account Fees and Transaction Costs

Account fees are the costs for maintaining your investment account. Many banks and brokers charge a monthly or annual fee for account administration. However, some providers, especially newer online brokers like Scalable Capital or Trade Republic, offer zero account fees. It’s worth comparing conditions to avoid unnecessary costs.

Transaction costs are incurred every time you buy or sell a security. These fees can be either a fixed amount or a percentage of the traded volume. Some brokers offer discounted or even free transactions, especially for ETF savings plans. Choosing brokers with low or zero transaction fees can help you retain more of your returns.

Trade Republic and Scalable Capital, for example, charge a low flat fee of one euro per transaction, with free savings plan executions, making them ideal options for cost-conscious investors.

Costs of ETF Investments: TER and Additional Fees

ETFs (Exchange Traded Funds) come with specific costs, mainly the TER (Total Expense Ratio). The TER includes all internal ETF costs, such as management fees, marketing expenses, and index replication costs. This fee is charged annually and typically expressed as a percentage of the invested amount. Most ETFs have a TER between 0.1% and 0.5%, which is automatically deducted from the fund’s assets. Your only task is to select an ETF with a favorable cost structure.

Additional fees, such as trading fees when buying or selling ETFs, may also apply. However, as noted, many brokers offer free ETF savings plans, which is especially appealing for long-term investors.

You can use our ETF Search tool to view the costs of specific ETFs.

Tax Considerations in Investing: What You Need to Know

Taxes are another crucial cost factor that many new investors overlook. In Germany, capital gains from investments are subject to certain tax rules that investors should be aware of. While tax regulations differ from country to country, most follow similar patterns.

Capital Gains Tax and Withholding Tax

Capital gains tax is applied to profits from investments, such as dividends, interest, and capital gains. In Germany, the capital gains tax rate is 25%, collected as a withholding tax. Additionally, there may be a solidarity surcharge and, if applicable, church tax, which can slightly increase the total tax burden above 25%.

The withholding tax is automatically deducted by your broker or bank and transferred to the tax office, so you don’t have to handle the tax payment yourself. However, there is a tax allowance (Sparerpauschbetrag) that allows you to earn up to €801 per year tax-free (€1,602 for jointly assessed couples). To take advantage of this allowance, you’ll need to submit an exemption order (Freistellungsauftrag) to your bank or broker.

If you are investing from Austria, look for a broker that simplifies taxes by automatically handling them similarly to Germany.

How to Minimize Investment Costs and Maximize Your Returns

Generally, minimizing investment costs is essential for maximizing returns. High fees and hidden costs can significantly reduce your profits, so it’s crucial to avoid unnecessary cost traps.

Comparing Providers and Platforms for Low Fees

The easiest way to lower your costs is to compare providers. Many online brokers offer significantly lower fees than traditional banks, as they operate without expensive branch networks or personal consulting. When choosing a broker, consider the following factors:

Account Fees: Choose a provider that doesn’t charge for account maintenance.

Transaction Costs: Check the costs for buying and selling stocks or ETFs. Many brokers offer free or heavily discounted transactions for savings plans.

Special Offers: Some brokers provide special promotions for new customers, such as free trades or reduced fees for a limited period. Others might also offer attractive bonuses for new clients.

Investing Long-Term to Reduce Costs

A long-term investment strategy can also help you reduce costs and increase returns. With buy-and-hold strategies (holding securities long-term), you can minimize transaction costs since you’re less frequently placing buy or sell orders. Frequent trading incurs more fees, which erode your returns.

Long-term investing also lets you fully leverage the compound interest effect, where your returns are continuously reinvested, accelerating the growth of your portfolio. This method is especially effective when you invest in low-cost ETFs with minimal management fees.

Conclusion

When investing, it’s essential to consider not just returns but also the various cost factors involved. Account fees, transaction costs, and taxes can eat into your profits, so it’s crucial to keep these costs as low as possible. By comparing providers, choosing low-cost ETFs, and adopting a long-term investment strategy, you can effectively minimize your investment costs and maximize your returns.