The Ultimate Guide to
The German Financial Market
The German financial markets have a long and storied history, with the Frankfurt Stock Exchange dating back to the late 1500’s. This Frankfurt-based exchange is the largest in Germany and in 2018 was ranked in the top 10 largest in the world by market capitalisation.
The Frankfurt Stock Exchange also accounts for 90% of German turnover at its two trading venues, with the remaining balance seen at Germany’s six other regional exchanges. Xetra is the first venue that handles stocks and exchange traded funds (ETFs) and forms the basis of the German DAX stock index. The second is the Börse Frankfurt, which primarily offers a private investor trading venue with approximately 1.6 million available securities.
In addition, according to the International Monetary Fund (IMF) the Euro (EUR) is now the second most popular reserve currency worldwide, amounting to approximately 19% of total central bank reserves in Q3 2018. The euro has even surpassed the U.S. dollar in terms of the value of notes and coins in circulation.
In general, German financial markets and the euro benefit from Europe’s economic strength, although they can come under pressure when EU member states show financial weakness or signs of separating. An example was the European sovereign debt crisis that commenced toward the end of 2009 as some Eurozone member states became unable to refinance or repay their sovereign debt or bail out local banks without external assistance. This crisis affected Greece, Portugal, Spain, Ireland, Cyprus and Italy.
Factors that influence the euro and German financial markets include the price of key strategic commodities like oil, as well as engineering exports like machinery, cars, chemicals and metals. Ups and downs in the ongoing Brexit negotiations have also had notable effects. In addition, an escalation in the U.S.-China trade war could potentially affect the German markets favourably since large and developed nations tend to benefit when those disputing countries lose.
Trading in Germany
The financial regulator in Germany responsible for overseeing contract for difference (CFD) and forex trading is known as the Federal Financial Supervisory Authority (BaFin). BaFin brings together under one roof the supervision of banks and financial services providers, insurance undertakings and securities trading.
BaFin recently announced it intends to place permanent restrictions on retail CFD trading at a national level, including those on the promotion, sale and distribution of CFDs to German retail clients. BaFin’s CFD product intervention measures will also include a protection for retail traders against negative balances, a maximum permissible leverage ratio, a trade close out rule when margin is depleted, an incentives restriction, and clear standard risk warnings.
With respect to stocks, the Frankfurt Stock Exchange (FSE) primary DAX index is comprised of 30 of the biggest and most actively traded German corporations that represent about 75% of the exchange’s total market capitalisation. The VDAX and the Eurostoxx 50 are additional indices, with equities trading on the exchange via the Xetra electronic trading system, in addition to funds, warrants, bonds and commodities.
Those looking to trade speculatively on the German financial market have a number options available through online brokers that let clients operate using their trading platforms:
- Forex Trading: Exchanging one currency for another forms the basis of forex trading. Exchange rates fluctuate as one currency rises or falls relative to another in particular currency pair. The popularity of forex trading has expanded greatly once online trading became possible. The forex market is the most liquid and largest financial market globally and had a daily turnover of $5.1 trillion/day in April 2016, according to data compiled by the Bank for International Settlements (BIS). The EU’s euro was ranked second by the BIS among the most actively traded currencies in 2016, making up around 31.4 percent of the overall forex market’s daily turnover that fell slightly from 2013’s 33.4 percent share.
- CFD Trading: Making transactions in derivative financial instruments known as contracts for difference (CFDs) allows traders to speculate on the future of their underlying assets. Such assets can consist of a currency pair, commodity, stock, stock index or other financial instrument.
- Demo accounts: Funded with virtual money, these accounts can be used to practice trading, test a strategy or check out a broker’s services and platform. Find out more on opening demo accounts here.
- Islamic accounts: These are suitable for traders who wish to trade in an account that conforms to Sharia law. Find out more on trading with an Islamic account.
Opportunities of Trading in Germany
Germany Trade and Invest (GTAI), the country’s economic development agency, points out a number of the country’s strengths that provide excellent opportunities for trading, investment and business in world’s fourth largest economy.
The GTAI also points out five of Germany’s key advantages as follows:
(1) A large domestic market with easy access the entire European Union.
(2) Third largest exporter, close to China and the United States.
(3) Competitive productivity, quality and unit labor costs.
(4) Excellent educational system with 81 percent at university entrance level or higher.
(5) Top research location in Europe, world innovation leader and leading patent applicant.
Furthermore, according to reports, more than 100 London tech startups are currently in the talks to move to Germany since the 2016 Brexit referendum. Of these many new FinTech startups, BaFin will regulate any company that offer financial services, including new Fintech firms, and this sector offers a potential route for advancement in the future.
Challenges of Trading in Germany
With Germany remaining a major part of the European Union, Brexit outcome fears, unrest in other European countries and the ongoing European Sovereign Debt Crisis have weakened the euro considerably. A lack of regulation could also lead to potentially higher investment and inflation risks, and the International Monetary Fund has increased pressure on Germany’s government to help reduce its high trade surplus by increasing public investment.
Furthermore, while Germany has a fairly stable and well-managed economy, its political structure has become quite divided in recent years, which can cause some concerns due to the need for coalitions. Chancellor Angela Merkel has announced she will not continue in office at the expiration of her current term in 2021 due to election setbacks, thereby leaving some uncertainty about her successor.
Summary
Traders will generally find German markets well-regulated by BaFin, as well as orderly and accessible via modern dealing and financial technology. When a trader is searching for an online broker to trade through, they should ensure that the firm has an appropriate asset classes range, an ergonomic trading platform, oversight by a good financial regulator, and sufficient trustworthiness to place a margin deposit with them.
