How to invest in German stocks: DAX declines draw bargain hunters to European powerhouse
Germany’s main stock market index, the DAX 40 (DE40), has fallen by more than 21% year-to-date as traders have become increasingly concerned about the prospects for a global slowdown in economic growth and as rising interest rates have led to outflows from stocks into fixed-income assets.
Past performance is not a reliable indicator of future results
But bargain-hunting investors with a long-term horizon for their portfolios have begun investing in stocks in Germany at low prices with a view to reaping the benefits when the market rebounds in the future.
The DAX 40 Index is a total return index of the 40 largest companies by market capitalisation and liquidity trading on the Frankfurt Stock Exchange (FSE). The FSE is the largest of Germany’s eight stock exchanges, which also include the Berlin, Munich and Stuttgart exchanges.
With companies like Linde (LIN), SAP (SAP), Deutsche Telekom (DTE), Siemens (SIE) and Volkswagen (VOW3) among the index’s top components, as of October 6, investors use the DAX as a measure of economic growth in Germany and Europe.
In this article, we recap the nation’s benchmark index performance and look at possible ways of how to invest in the German stock market.
How has the DAX been performing?
The stocks in the DAX Index have come under increasing pressure in recent months as the prospects for a recession in Europe and beyond have increased. Provisional data from the German Federal Statistics Office released on 29 September showed that inflation climbed by 10.9% year on year in September, up from 7.9% in August, to its highest level in more than 25 years.
The increase was driven by the spike in energy prices since the start of the Russia-Ukraine conflict, with prices up by 43.9% from September 2021. Food prices also rose by an above-average 18.7%. The statistics office commented:
The high inflation rate in the European Union’s largest economy increased the prospects that the European Central Bank (ECB) could hike interest rates by another 75 basis points (bps) at its next monetary policy meeting on 28 October. The ECB raised rates by 50 bps in July to zero, its first increase since 2011, and delivered a record 75-bp hike in September.
The D40 Index peaked at an all-time high above 16,250 points in November 2021, at which point the financial markets turned bearish. The index started 2022 at the 16,000 level and dropped towards 12,830 in March amid the Russia-Ukraine conflict. The index rallied to 14,800 at the end of the month but was unable to hold the gains as Covid-19 lockdowns in China, soaring commodity prices and the US Federal Reserve (Fed) starting to raise interest rates weighed on sentiment.
The DAX declined to 12,400 in early July and rallied over the summer to reach 13,900 in mid-August as sentiment turned positive on the US markets on hopes for a slowdown in interest rate hikes. But US inflation data in August dashed those hopes and the DAX resumed its decline, falling to 11,975 on 29 September, its lowest level since October 2020.
The volatile market environment weighed on the $72bn initial public offering (IPO) of luxury sports car brand Porsche (P911), which parent company Volkswagen listed on the FSE on 29 September in the biggest listing on Germany’s stock market in over 25 years. The stock opened trading at €84.00 per share, rose to €86.18 before falling back to €82.54 at the end of the first session and then subsequently dropping to a low of €81.10 on 3 October. A broad market rally on 4 October brought the price back up above €86 per share.
Before we take a look at how to start investing in stocks in Germany, it is important to note that past performance does not guarantee future returns. Before making any investment decisions, you should conduct your own research to form an opinion on the market’s performance and potential future.
What is your sentiment on DE40?
How to invest in German stocks
To start investing in the DAX, there are different instruments you can buy and sell depending on your investing experience, preference and your portfolio composition.
You can invest in the individual stocks that make up the DAX Index, allowing you to tailor your holdings to contain only the companies you want exposure to in your portfolio. This enables you to target a particular type of company or industry sector. Alternatively, you can gain broad exposure to all 40 stocks in the index by investing in a DAX-tracking exchange-traded fund (ETF).
If you are looking to make short-term trades to try to profit from fluctuations in the index, you could consider futures, options or contracts for difference (CFDs) for your trading positions.
Investing vs trading
Investing and trading are terms that are often used interchangeably, but they refer to different strategies for aiming to profit from financial assets. Investing is a long-term approach that aims to generate profits from buying stocks and selling them at a higher price in the future – often years or even decades later. In contrast, trading involves taking short-term positions on assets – holding them for weeks, days, or even hours.
Futures and options allow traders to speculate on the price of an asset such as an ETF on a specified date in the future. With options contracts, traders agree a strike price at a premium or discount to the current futures price with no obligation to buy the asset on expiry. Futures contracts obligate the buyer to take ownership of the asset or roll the contract forward before the expiry date.
Alternatively, you could use CFDs, which unlike futures and options give you the flexibility to take a long or short position on an asset.
Learn more about CFD trading: How to buy and sell stocks in Germany with CFDs
A CFD is a contract between a broker and a trader that pays the trader the difference in the price of an underlying asset between when a trade is opened and when it closes. Important to note that with CFDs, traders do not own the underlying asset but speculate on its value fluctuations.
If you expect an asset price to go up you can open a long position, but if you expect it to fall you can take a short position in order to try to profit from a decline in the price.
Trade Germany 40 (Europe, Dax) - DE40 CFD
Past performance is not a reliable indicator of future results
A CFD is a leveraged financial product. This means that CFDs traders use margin accounts and need to put down only a fraction of the total capital required to open a leveraged position. Keep in mind that while leverage multiplies the size of gains, it also multiplies the size of losses. Make sure you understand how CFDs work before you start trading. You can learn more in our comprehensive margin guide and CFD trading guide.
Note that CFD trading is highly speculative and involves the significant risk of loss. Traders have to consider their financial goals, portfolio composition and risk appetite before deciding to trade CFDs.
What are the risks of investing in or trading German stocks?
There are potential opportunities for investors and traders to profit from investing in some of Europe’s largest companies listed on Germany’s stock market. However, there are also risks that you should be aware of before investing in the DAX or individual stocks.
Some of the largest stocks in the DAX are energy-intensive companies in industries such as automotive, engineering and materials, including Volkswagen, BMW (BMW) and Bayer (BAYN). Germany is Europe’s largest importer of oil from Russia and the ongoing geopolitical tensions could deepen the energy crisis, particularly heading into winter.
Germany is also the world’s third largest exporter, meaning that a global economic slowdown would have a significant impact on demand for its goods. That in turn is likely to weigh on the revenues and share prices of the companies listed on Germany’s stock exchange.
Rising interest rates in Europe, the US and elsewhere could further weigh on German stocks as investors sell off stocks in favour of alternative investments such as fixed-income assets. And as an EU member state, Germany is at risk from contagion from debt and other economic issues in other countries.
The bottom line
The German stock market offers opportunities for investors to gain exposure to some of Europe’s largest companies and profit from potential future gains in their share prices. You can use several different instruments, including real stocks, ETFs and CFDs, depending on your risk tolerance, investing or trading strategy, and how much money you are willing to risk. Make sure you are aware of the risks of investing and trading before you put any money on the line.
Note that this article offers no investment advice or financial recommendations. If you are interested in how to start investing in Germany, we recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion before making any investment decision. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.
FAQs
Can foreigners buy stocks in Germany?
Foreigners can invest in German stocks by using an international broker that offers investors access to companies listed on the German stock exchanges or exchange traded funds that invest in them.
Where can I buy German stocks?
You can buy German stocks in a brokerage or trading account. When searching how to invest in German stocks, make sure to always do thorough research first.
What are the benefits of trading German stocks?
Trading German stocks gives you access to some of Europe’s largest companies based in one of the world’s most stable economies, which is also a top three exporter. However, you should keep in mind that trading stocks in any country’s companies, as well as any other financial assets, comes with the risk of losing money. You should do your own research to take an informed view of the company and the stock’s potential.
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