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Create a savings plan for shares?

You may have been thinking about investing for a while and wondered whether a savings plan for shares might be worthwhile for you or whether other solutions might suit you better. In this article, you’ll learn more about how a savings plan works, what the advantages and disadvantages are and who it might be suitable for.

In brief:

  • In this article, you will find out what exactly a savings plan for shares is and how it works
  • What are the advantages and disadvantages of setting up a savings plan for shares and whether a share savings plan suits your situation
  • The comparison: Is it better to set up a share savings plan or make an individual investment?
  • We show you what fees may be incurred with a share savings plan and what you should bear in mind

Is it worth investing in shares via a savings plan?

Would you like to invest money properly and are wondering whether a share savings plan could be worthwhile? Depending on your financial situation, a share savings plan may be more or less suitable for you. In the following, we will go into more detail about how exactly a share savings plan works so that you can get an overview.

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What is a share savings plan?

Some investors opt for a share savings plan to earn money with shares. They want to invest at regular intervals without additional effort. You can choose fixed intervals for this, for example quarterly or monthly payments.

In addition, you select your desired shares and a desired amount, which is automatically withdrawn on the respective key date. This money is then used to purchase a share of the corresponding company stock each month, for example.

This is how the share purchase works

Good to know:

Investors with a share savings plan do not acquire at least one share each month, but receive shares depending on the current share price.

If you make an individual purchase and buy a specific company share, the entry point plays an important role. A savings plan for shares works automatically, so you don’t have to worry about the right time.

This is how the so-called cost-average effect works. Share prices are subject to fluctuations and are constantly changing. This means that you buy at different prices every month, sometimes more expensive, sometimes cheaper.

Overall, the costs are approaching an average price. With an individual purchase, it is possible to buy at a very expensive price. When investing in a share savings plan, the time of entry does not play a role. The influence of price fluctuations can be reduced in this way.

How do I set up a savings plan for shares?

You need your own custody account with a bank or broker to be able to invest in securities. If you do not yet have your own custody account, it is highly recommended that you find out about the conditions in advance in order to find a suitable bank.

The costs can vary greatly, for example the fees for maintaining a securities account. In addition, not every broker allows you to set up a savings plan for shares in every specific company, which is why you should find out in advance whether your desired share is available for setting up a savings plan.

In order to make an informed decision, it is helpful to read experience reports on the most popular portfolios. You can find a detailed overview and evaluation of various portfolios here.

If you have already decided which shares you would like to invest in, you can select them. Then think about which time intervals you prefer and change your settings accordingly. Smaller, regular deposits are an excellent way to work on building your wealth over the long term.

  • Incidentally, the amount that is automatically invested is debited from your clearing account
  • The shares are then purchased and credited to your securities account
  • If your financial situation changes and adjustments are necessary, you can flexibly change these settings at any time and pause, reduce or increase your savings rate

Good to know:

Use free online comparisons to find suitable offers for setting up a savings plan at the lowest possible cost!

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What are the advantages of a savings plan?

A particular advantage is that investors who currently have less money available to invest can also work on building up their assets. When setting up a share savings plan, shares are purchased.

  • An investor does not buy company shares, but receives a share in the company
  • This means that company shares characterised by very high prices are also accessible
  • This way, anyone can start investing, regardless of the amount of their own assets

Another advantage of an automated share savings plan is that it is easier to constantly work on building up your wealth. If you haven’t set up a share savings plan and have to make purchases manually, you may invest less or forget to do so from time to time. With a savings plan, on the other hand, everything is automated and effortless.

Another advantage is the aforementioned cost-average effect. With a share savings plan, you don’t have to make sure that share prices are low so as not to reduce your future return. Instead, the influences of fluctuations are very small and converge towards an average price over longer periods of time.

The high flexibility of savings plans is also particularly appealing:

  • Do you have unexpectedly high expenses this month? No problem, you can easily adjust your share savings plan and either reduce your savings rate for this month or simply pause it
  • You may also have more money available this month and would like to increase your instalment once
  • Your savings plans can be customised quickly, easily and at any time to suit your exact financial situation

In addition, you will have less work setting up your share savings plan in future. If you invest now and again without a savings plan, you have to pay close attention to the right time to enter the market and monitor prices. With a share savings plan, you have to deal with the details once, in future everything will work automatically.

ETFs vs. individual shares

What are the disadvantages of a savings plan?

Let’s move on to the possible disadvantages of a share savings plan. The costs can vary. While some providers allow you to save in share savings plans free of charge, other banks may charge high fees. Therefore, find out about the fees incurred when comparing share savings plans so as not to reduce your return.

  • A major disadvantage is the higher risk
  • With a share savings plan, you invest regularly in the same few company shares
  • This makes you very dependent on the performance of a few companies, even if you focus on safe shares
  • This means that your risk is not diversified; if a company performs significantly worse than expected, you can feel this strongly in your portfolio

The argument of higher risk also goes hand in hand with high price fluctuations. If you invest in just a few companies, you will be more exposed to fluctuations than with a broadly diversified portfolio. The usual risks of securities therefore apply. An ETF savings plan comparison would eliminate problems such as low diversification.

These costs are incurred with a share savings plan

When deciding on a bank, you should take possible custody account fees into account. These can vary greatly in some cases. While the costs are high with some providers, other banks or brokers offer free savings. You can find out more in our ‘TradeRepublic savings plan recommendation’.

  • The purchase of individual shares often incurs the traditional order commission, which does not apply to share savings plans
  • This means you don’t have to worry about order fees with many providers
  • On the other hand, you should pay attention to execution fees, which usually make up a fixed percentage
  • These are usually 0.20 per cent or slightly higher

If you have an ETF portfolio, you may be wondering about ongoing management costs. These are not incurred when setting up a share savings plan and do not need to be taken into account. However, depending on the provider, there may be a maximum or minimum fee.

This shows how important it is that you compare the possible costs before deciding on a particular share or bank. Even if the differences seem small at first glance, there can be big differences in long-term investing that can affect or boost your returns.

Savings plan vs. one-off investment

Your financial situation can determine whether an individual investment or a share savings plan is more suitable for you. If you already have a large amount of money available that you would like to use now to realise returns, a one-off investment may be worthwhile:

  • If you have a large amount of money and invest it, your assets will immediately start working for you
  • In the long term, you can achieve higher returns this way than if you slowly invest the same amount in your portfolio in small amounts

Savings plans are suitable if you don’t yet have a large amount of money and want to work steadily on building up your assets in smaller steps. At this point, it can be worthwhile starting to invest as early as possible and not waiting until you have saved up a larger sum.

If you haven’t invested before and already have a larger sum available, you can also opt for a combination of the two if you are still unsure. Start with a small share savings plan and invest a larger sum once you have gathered enough information and feel more confident.

Share Alternative – Invest in P2P?

P2P enables one private individual to lend to another private individual without the need for a bank. People who need a loan have the advantage that financing their projects is usually much faster than with a bank. Banks sometimes have major bureaucratic hurdles.

Good to know:

Investors who lend money have the advantage of benefiting from attractive potential returns and being able to support private projects. So-called P2P marketplaces act as intermediaries and bring borrowers and lenders together.

These marketplaces or platforms play an important role: they categorise borrowers into different credit ratings in order to create more transparency for investors. This allows investors to see how risky the respective loan is.

As with other asset classes, high risk goes hand in hand with high potential returns. One of the biggest advantages of this asset class is the high degree of individualisation. Security-oriented investors can select very safe loans with low returns, while profit-oriented investors can also consider risky loans.

How does P2P lending work?

In this way, a customised strategy can be developed to suit your needs as an investor. However, there are also risks:

  • With inexperienced providers, it can happen that credit ratings are incorrectly assessed
  • As with other investors, there is an increased risk if there is no appropriate diversification. However, it is possible to spread risk sufficiently by diversifying with P2P loans
  • It is still unclear what exactly happens when a P2P platform goes bankrupt. Collateral is often deposited. It is advisable to invest in a German platform
  • You can find out more about P2P loans here
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Conclusion: Shares savings plan – long-term wealth accumulation

Investors can use a share savings plan to automatically invest certain amounts of money at fixed intervals. Depending on the price and the amount invested, you receive shares in return. This comes with various advantages and disadvantages.

A particularly positive aspect is that the entry hurdle for investing is comparatively low. In addition, you can constantly work on building up your wealth with less effort. You buy at different share prices and therefore converge towards an average price, also known as the cost-average effect. Your savings plan is also very flexible.

One possible disadvantage is the different costs, which is why an online comparison is recommended. In addition, the diversification with share savings plans is low and there can be high price fluctuations.

Whether a savings plan for shares or an individual investment is more worthwhile for you depends on your financial circumstances. If you don’t have a lot of money at your disposal and want to build up assets over the long term, a share savings plan is a good option. Savings plans are also an excellent way for beginners to gain more confidence in investing.

If, on the other hand, you already have a large amount of money, you could consider a one-off investment so that your money can start earning returns and working for you as early as possible. Find out more about ‘top dividend shares’, ‘share buybacks’ and ‘the 10 best value investmentshere.

FAQ: Savings plan shares – Frequently asked questions

About our author

Aleks Bleck is the face of Northern Finance and was already a shareholder, lender and ETF investor at the age of 18. His focus is on P2P loans and passive ETFs. Aleks founded Northern Finance in 2017 while studying business administration in Lu00fcneburg.

He built up the YouTube channel alongside his main job in investment and corporate banking before finally focusing full-time on Northern Finance.

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