How to Buy Stocks in Europe: A Step-by-Step Guide for European Investors

To buy stocks as an investor based in Europe, you’ll need a brokerage account and a little bit of know-how. This guide will walk you through the process, from finding a broker to placing your first trade.

It’s no secret that the stock market can be a great way to build wealth. But if you’re new to investing, the process of buying stocks can seem confusing. Many think investing is too risky and prefer parking their money in a regular bank account and losing 8% per year to inflation

Sticking to cash may feel secure, and it’s perfectly fine if you’re not comfortable dipping your toes in the stock market or need the money in the near future. But if you have a longer time horizon and are looking to grow your wealth over decades, investing in robust public companies can offer you the potential for much higher returns than what you’d earn from a savings account.

To buy stocks (or ETFs), you need to open a brokerage account for your investments. You can set up an account in less than 10 minutes, and there are plenty of reputable online stockbrokers in Europe to choose from. Then, once you’re funded your account, you’re ready to start buying stocks. Here are five easy steps to buy stocks in Europe, plus a few things to keep in mind as you get started.

Step 1: Open a brokerage account

A stockbroker or brokerage is a company that lets you buy and sell stocks, usually for a small commission. The primary function of a broker is to act as an intermediary between buyers and sellers in the stock market. For every trade in the stock market, there needs to be a seller for every buyer, and vice versa. The role of the stockbroker is to match these parties and execute the trade on behalf of their clients. In the past, you would have needed to visit a physical office, typically a bank, and speak to a human broker in order to open an investment account and buy stocks. But as most brokerages have now moved online, you only need an internet connection and a computer or mobile device to get started.

Read more: The best online brokers in Europe

You have plenty of options for online brokers if you’re based in Europe. The best broker in Europe for you will depend on where you live, what type of investor you are, how you plan to invest, and what services you’re looking for. Some online brokers operate throughout most of Europe, like Interactive Brokers and Saxo Bank, while others cater to a select few countries, like DEGIRO and Trade Republic. A third group target specific regions, such as Nordnet or Flatex, and only have platforms available in local languages.

Common to all these brokerages is that you submit your personal information and identity documents online to open an account. The process is generally quick and simple for the majority of people, but for certain demographics, like expats or immigrants, it may take a bit longer. You also need to answer a series of questions regarding your financial situation, including your sources of income, investment goals, and risk tolerance. The list of questions necessary for compliance seems unending and only gets longer as the European Union and individual countries keep passing more anti-money laundering regulations. But there’s not much you can do about it, so it’s best to just spend the 10-15 minutes answering the questions and move on.

What is a stock brokerage anyway?

The only financial institution most retail investors will ever interact with is their online broker. Well, not really. Most of us never get to see or talk to the people at our brokers. We just open an account on their website or app, deposit some money, and start trading. We press that green buy button on our phone, and magic happens: money leaves our account, and shares appear in our portfolio. Digitally, anyway. But you’ve probably figured there’s a business behind the pretty trading interface because someone had to code it and make the hocus pocus real.

And that’s what a broker is: a company that provides the technology and services necessary for you to buy and sell stocks. Like a mortgage or insurance broker, a stockbroking business is a middleman between the customer and the market. When you want to buy stocks at a specific price, the broker is responsible for finding a marketplace where someone else is willing to sell you those shares at or near that price. That marketplace is a stock exchange, and it’s the place where brokers meet to transact on behalf of their clients. In the old days, this was done on marketplaces and physical trading floors, where traders yelled out prices and buy and sell orders. Nowadays, nearly all trading is done electronically on computer systems.

Brokerages that operate within the European Union are formally known as “investment firms” and are regulated under something called the Markets in Financial Instruments Directive (MiFID). In the U.S., brokerages are called broker-dealers. The terminology and regulatory differences between the two sides of the Atlantic can be confusing because most of the information you can find about the subject online is written from the American perspective. What’s essential for European investors to know is that MiFID-licensed brokerage firms can operate freely across the EU, though many choose not to. By being licensed to deal with securities, an investment firm must fulfil all kinds of requirements regarding capital, risk management, and client protection. A lot goes into operating a brokerage, and it’s not something that can be done lightly.

Step 2: Find a stock or ETF

Stocks and exchange-traded funds (ETFs) are the two simplest types of financial assets investors can buy. Stocks are shares of direct ownership in public companies, while ETFs are a group of assets, typically stocks or bonds, that trade on an exchange like a stock. Investors who buy shares of stock in an individual company usually do so because they believe the business will be more successful than the overall stock market. ETF investors, on the other hand, take the approach that it’s difficult to beat the market, so they make a bet on the market as a whole by buying an ETF that tracks a specific index.

Whether you want to buy stocks or ETFs, you’ll need to do some research before you make your first purchase. Many stock investors prefer to buy stocks in large, well-established companies that they’re familiar with. These are called blue chip stocks, and while they may not have an above-average return potential, they’re usually more stable and have lower downside risk. Any internationally operating company with a $100B plus market capitalization and a history of strong financial performance is usually considered a blue chip.

ETFs are regarded as being a passive, long-term investment strategy because they typically track stock indexes. These indexes contain hundreds or thousands of companies, which reduces the risk that comes with investing in any one company. When you buy an index-based ETF, you’re buying a small piece of each company that’s in the index the ETF tracks—without having to research and pick each company individually.

What to look for in a stock 

First, determine the businesses and industries you a most interested in. Before you buy any stock, you must find out the sources of the companies revenue. What do they produce? Where do they operate? What is their reputation in the industry? 

This essential information is easy to obtain online. It goes a long way to help you familiarise yourself with the company before spending your money buying part ownership of the company. 

  • Study the trend in earnings growth: A company with positive growth tends to be financially and operationally viable, no matter how small. How are they driving growth in earnings? A company that has proven strategies for growing earning is a company worth investing in.
  • Check out the price-earnings or P-E ratio: the P-E ratio of a company’s stocks let you know if the company is undervalued or not. This ratio compares the trading price of a company’s stock to its annual earnings per share over the past year. It helps you to compare companies in the same sector or industry. A stock could be a good choice if it has a lower P-E ratio because it’s possibly undervalued by the market and tends to yield massive gains. 
  • Dividends: does the company pay dividends? If yes, does the value paid increase consistently over the years? Companies that pay dividends always are typically stable companies with ascertained profitability.
  • Long-term stability: A company that holds and increases its’ value over time, despite the downturns and volatility characteristic of the stock market, is a good pick. Long-term stability is an indication that the company has excellent leadership, grows profit, is well-positioned in the market, and maintains a low to moderate debt level.

Types of stocks

There are many different types of stocks, but the most widely traded ones on the market are:

European stocks: European stocks are stocks of companies based in Europe. European stocks include all companies that trade on European stock exchanges. This includes stocks from the United Kingdom, Germany, France, Switzerland, Italy, Spain, Sweden, and many more. Examples include Roche, Nestle, and Novo Nordisk. European stocks are traded in euros, pounds, Swiss francs, and other local currencies on Euronext, Deutsche Börse, and the LSE, to name a few exchanges.

US stocks: These are stocks of companies from the US. US stocks are traded on various US Exchanges, such as the NASDAQ and the New York Stock Exchange. The US is home to the largest companies in the world, such as Tesla, Apple, and Amazon, which makes them the most widely traded and sought for. You can only trade US stocks in dollars, but they often have a European equivalent you can trade on Deutsche Börse or similarly.

Value stocks: Value stocks are shares of companies that trade at a lower price relative to their market value and could see price gains once the market recognizes its actual value. Companies with low P/E ratios relative to their earnings are typically considered to be value stocks. Value stocks can be compared to growth stocks, which usually trade at higher prices relative to their market values and earnings.

Growth stocks: Growth stocks are shares of companies notable for quick, solid growth in profits or revenue. They are usually young companies in emerging markets with strong growth prospects. Even if the stock seems expensive, the idea behind investing in growth stocks is that the rapid growth will translate to solid price gains over time. 

Cyclical stocks: These are stocks of companies that are sensitive to the prevailing economic conditions and witnesses price swings as the market changes. When the economy is healthy, and the unemployment rate is low, these businesses typically do well. When the economy tanks and unemployment rises, their stock prices also fall because people spend less. Car producers, airlines, furniture retailers, clothing businesses, hotels, and restaurants are among the companies with cyclical stocks.

Dividend stocks: Dividend stocks regularly pay out some of their earnings to shareholders in the form of dividends. That’s why they’re also known as dividend-paying stocks. Dividends can be paid quarterly, semi-annually, or annually. Some investors like dividend-paying stocks because of the way dividends are taxed in their nation. In contrast, others prefer accumulating companies since they do not get favourable tax treatment where they live.

Good to know: How to buy US stocks from Europe

If you want to buy US stocks from Europe, you can do with almost any online brokerage that operates in your country. You can then have access to any of the stocks you have an interest in. Some of the leading US-based brokers in Europe include Interactive brokers, DeGiro, and Firstrade.

Step 3: Find a stock exchange

Once you have selected your stock of interest, the next step is to look for the exchanges that list your target stocks. For European investors, buying through a Europe-based stock exchange is usually the cheapest option because of exchange fees and currency conversion fees. But you can only buy some stocks on overseas exchanges like NASDAQ or NYSE. The largest exchanges in Europe are:

  1. Euronext: Euronext is the largest exchange by Market capitalization at US$4.88 trillion. They operate exchanges in seven European cities – Amsterdam, Brussels, Dublin, Lisbon, Milan, Oslo, and Paris. Due to its extensive presence, it offers access to more than 1,800 listed companies.
  2. London Stock Exchange: The London Stock Exchange is one of the largest and best-known exchanges worldwide. With a Market capitalization of US$3.67 trillion, the London stock exchange allows you to trade shares in over 1,000 companies from 100 countries. The FTSE 100 index (or footsie) tracks the performance of the 100 largest companies (based on market capitalization) listed on the exchange. Some of these companies include AstraZeneca PLC. Unilever, HSBC Holdings, and Diageo.
  3. Deutsche Börse AG (Xetra): Deutsche Borse AG (Xetra) has a Market capitalization of US$2.06 trillion and operates the largest German stock exchange – the Frankfurt Stock Exchange. Here, you can trade over 1,000 local and international shares on Xetra (Deutsche Borse electronic trading system), including Adidas, Allianz, Bayer, and BMW. You can also trade more than 1,800 ETFs and ETPs. It also features a DAX index, which tracks the performance of 30 leading German Blue chip stocks.

Step 4: Fund your account

Having picked your stock and the best exchange to deal with, the next step is to open a brokerage account with a brokerage service that has access to the exchange listing the stocks you are interested in. 

Decide on how much you are willing to put down for your investments. It will help if you start small since investing can be volatile and only invest cash you can afford to lose. As you gather knowledge and experience, you can add to your portfolio. Thanks to fractional shares, you can buy fractions of shares that are out of your reach financially. 

Finally, you have to fund your newly opened brokerage account. There are two ways you can fund your account – Bank Transfer or Card Top-up.

  1. Bank transfer: You can conveniently fund your account for a small fee by linking your bank savings or checking account and transferring funds. The funds will likely reflect on your broker’s account the next working day. You can also use a wire transfer or deposit a check. 
  2. Card top-up: Most online brokers will give you the option of funding your account with your debit card. This method is instant, and the money will be posted to your brokerage account immediately. However, you’ll pay higher fees for the services.

Step 5: Buy the stock

Now that you have created an investing strategy in line with your goals, selected your stocks, and opened a brokerage account, it’s time to execute a trade. But when buying a stock, you need to choose an order type. 

There are many different order types available, and how you use them depends on your specific investment needs. But the two most common ones are market orders and limit orders:

  • Market orders: tells the broker to buy the target stock instantly at the lowest price available. Because prices change rapidly, market orders may be executed at a different price from the one you saw when entering the order.
  • Limit orders: For limit orders, you state the price you are willing to buy the stock, and the purchase is only executed when your target stock falls to that price or lower within a set period. If the stock never drops to that price within the stated time, the trade is canceled. 

Novice traders often use market orders since “click-and-buy” is so simple, but it’s crucial to understand limit orders to manage the price you pay. Limit orders guarantee you won’t pay more than the specified price per share, but it also means that there is a greater risk you won’t get your order filled. Limit orders are used to set a maximum price per share when buying stocks, and they allow you to control how much you spend. In comparison, market orders guarantee you will definitely buy at the best available current price, but it also means that you’re risking a greater chance of an unfilled order.

What happens behind the scenes?

What happens when you press the buy button in your brokerage’s trading platform? There’s a complex infrastructure of different financial institutions working together like a well-oiled machine to ensure the stock market runs smoothly. The only one of these companies you’re likely to interact with directly is your broker. However, there are still plenty of other participants involved in each and every trade.

When you, the investor, want to buy shares of a company, you place a buy order with your broker. The broker then sends this order to an exchange, where it’s matched with a corresponding sell order. The sell order can either come from another investor, an individual or a company, who wants to unload their shares, or from a liquidity provider or market maker whose job is to ensure sufficient liquidity on the exchange.

Once the buy and sell orders are matched, the broker passes on the trade details to a central counterparty called a clearing house. Clearing houses are electronic systems that safeguard the investor, seller, and broker by guaranteeing that stock and money are transferred as they’re supposed to. The clearinghouse will act as a guarantor for both the buyer, ensuring delivery of shares, and the seller, guaranteeing payment. After the trade is completed, the shares are transferred to the buyer’s account, and the cash is sent to the seller’s. 

Finally, the clearing house passes on the trade settlement details to a central securities depository, where the trade is digitally registered, and the shares are moved from the old to the new owner’s name. This usually happens two days after the initial trade and is known as T+2 settlement (trade date plus two days). In most modern depositories, however, shares are not registered directly in the shareholder’s name but in the broker’s name. This is called nominee, pooled or omnibus registration, and it’s done to make things more cost-efficient, simpler and faster for both the shareholder and the depository. Physical share certificates are rarely ever moved around anymore, as almost all trades are settled electronically.

This is just a shallow overview of how stock trades are settled, and, as an investor, you really don’t need to know all the intricacies of how the system works. But it’s better to know a little than to throw money into stocks completely blind.

Considerations when buying stocks

Look into ETFs for diversification

ETFs are securities that track indexes, commodities, or baskets of assets like an index fund. With an ETF, you can buy one security at a time instead of buying the individual stocks of thousands of companies if you want to replicate the same returns as an index. Since ETFs offer instant diversification, they are handy for beginner investors because you can buy single securities that give exposure to many different investments.

Think carefully about taxes and when to sell

At some point down the road, you may need the money you have invested in stocks. If you have invested long-term with a defined goal, you should have a strategy and a timeline to accomplish it.  

Before you submit a sell order to your broker, keep in mind the tax consequences in your country. If the stock price you hold has risen, you may have to pay capital gains taxes, although not every country has this tax.  

In some European nations, the taxation of short-term versus long-term transactions is different (typically two years or more). Other countries have no tax on sale proceeds but impose wealth taxes instead. In short, keep in mind the rules of the country where you pay taxes.

Fortunately, there are usually local ways to pay as little tax as legally possible, such as by investing in tax-sheltered accounts, maximizing capital gains tax-free allowances, or borrowing against your portfolio to avoid selling at all.

Manage your risk and think long-term

Proper risk management is a vital aspect of investing in stocks, and it’s the key to profitable investing. Thoroughly research the companies you intend to buy their shares and avoid any investment outside your risk acceptance boundaries. Focus on portfolio diversification, asset allocation, and dollar-cost averaging to reduce your risks. Overall, a long-term horizon is best to minimize short-term fluctuation risks.

Why it can be a good idea to invest in stocks

Investing in stocks is an excellent idea for anyone just starting to build their wealth. Although it’s important to understand that investing comes with risk and buying individual stocks can be risky, having your money work for you over time has its advantages.

  • High returns: To potentially earn higher returns compared to other investments like gold, bank, and government bonds.
  • Passive income: To earn regular passive income in the form of dividends. 
  • Liquidity: Stocks can be easily bought and sold, making them a more liquid investment than other alternatives. 
  • Fighting inflation: The returns on stocks have historically outstripped the inflation rate. So investing in stocks can safeguard your wealth against decprecation. 
  • Easy to start: Finally, stock investing has a low barrier to entry. Unlike real estate and many other alternatives, you can buy stocks with very little money, even the top stocks. This is possible through fractional shares–the practice of purchasing a portion of stock. 

What the risks are of investing in stocks

Considering how volatile the stock market can be, buying stocks is not entirely without risks. Here are the major pitfalls to watch out for:

  • Losing your money: There’s no reward without risk. Stock prices change frequently, and often unpredictability too. Investing in stocks means there’s a chance you could lose all of your money, especially if you play in the short term. You could even lose more than your capital if you apply leverage with margin trading or short selling.
  • No guaranteed returns: Despite your best efforts, investing in stocks may not give your the returns you expected. Nothing is guaranteed. You can’t tell with certainty how a stock will perform in the future. There’s no guarantee that the price will rise or the company will still be in business. 

Your time horizon

Time horizon estimates the time you can afford to put away your money in investment before you need it. The time horizon for your investing goals will determine the stocks to choose that best align with your purposes. Investment time horizons fall into three broad categories–short, medium, and long terms. 

  • Short Term: Any investment that you plan on holding for less than a year is considered to be short-term. Assets with a short-term time horizon leave little room for recovery if things don’t go as planned. The best stocks for investing in the short term are those of solid blue-chip companies. These companies are established, large corporations with an excellent balance sheet, which indicates a minimal risk of loss. However, the returns from these investments, although stable, tend to come at a slower pace. 
  • Medium Term: A medium-term investment is an investment you plan to hold on to anywhere from one year up to 10 years. Because the medium-term horizon gives you ample time to recover when the markets go south, consider investing in emerging markets stocks with great potentials. Other stocks with moderate risk levels are also well suited for medium-term investing. 
  • Long Term: An investment you intend to hold for more than ten years falls under the long-term time horizon. Here, you have the most time to recover if things go badly. Therefore, the best stocks for the long term are those with higher risk levels. They have the highest potential to generate significant returns. 

Your risk appetite 

Evaluate how much risk you are willing to take on. All investments have varying degrees of risk. Keeping your money in the bank, which is FDIC insured, is significantly less risky than buying securities like stock, bonds, or mutual funds. The government does not insure the money you invest in securities. So you must understand that you could lose your capital. 

However, for taking on more risk, you potentially stand to earn higher returns. If you are willing to invest for the long term, you are better off putting your money in stocks and bonds which carry some risk rather than investing in assets like CDs with less risk. Cash investments, on the other hand, are better for short-term horizons. But when you invest in cash equivalents, you risk having your returns eroded by inflation.

Your investment strategy

One of the first steps in your investing journey is to study the various investing strategies and stick to one. Investment strategies provide you a model to follow when choosing stocks to buy or sell without resorting to emotions and guesswork. Before you buy a stock, you must ensure the stock ticks all the boxes according to your chosen strategy.

Here are the key investment strategies to study:

  • Value investing. An investment strategy that involves finding quality stocks that are undervalued relative to their peers. Value investors use various tools to discover the actual value and buy those stocks trading for less than their true value. The principle is that with time, these undervalued stocks will catch up with the rest of the market, making huge gains for the investors. Value investors are notable for their contrarian views: they tend to take the opposing view to the general investing public. 
  • Growth investing. deals with finding stocks that have demonstrated strong performance historically. Growth investors expect that these upward trends in growth, earning, and price appreciation will continue to outstrip the market, making them huge gains. However, the underlying analysis may be too much for a newbie, and also, growth stocks tend to be more volatile. 
  • Income investing. Income investing strategy is concerned with buying quality stocks that pay a dividend. A great way to earn passive income, you can reinvest dividends further to increase your earning potential. 

Closing thoughts

Investing in stocks is a proven way of building wealth while taking on some risks. However, there are many ways you can invest, and each has its advantages and disadvantages. In this article, we discussed the different types of stock brokerages that exist and some things to consider before investing on your own. It’s essential to think about which type of brokerage will work best with your unique circumstances, your time horizon, and what kind of investments fit your risk appetite. Investing in stocks, ETFs, or other products is not without risk, but as they say: nothing ventured, nothing gained.

FAQ

No. Robinhood is not yet available in Europe. Although they planned to open in the UK in 2020, the Covid-19 pandemic scuttled their plans.

Yes. No laws prohibit non-U.S citizens from investing in the US stock markets. Several brokers in Europe give you access to any US stock of your choice.

Stocks and shares refer to the same thing. However, there are slight differences in syntax. “Stocks” are generically used to describe ownership of a slice of one or more companies. In contrast, “shares” are more specific and refer to ownership of a portion of a particular company.

While the pandemic has adversely affected the economy and taken its toll on the stock markets, there’s no reason to be overly pessimistic. With vaccination and the reopening of several industries, the likelihood of a market collapse is rare. However, no one can say with certainty how the market will turn in the near future.

The best time to buy stocks is now. The earlier you get started, the more your chances of being profitable in the long run. Waiting for the perfect time has little impact on your returns in the long run.