Extreme share price swings in recent weeks mean a massive revenue spike for online share trading companies. At the top of my investment list to profit from this situation is FTSE 250 share IG Group (LSE:IGG).
The London stockbroker and trading platform offered some juicy details in a recent update.
A report out on 19 April showed this was IG’s third-best quarter ever. Revenue in the three months to the end of February rose 29% to £139.8m. Its active customers rose 21% to 101,700 in the third quarter.
And the shares now pay a near-6% dividend yield.
“Financial market volatility has been sustained at exceptionally high levels since the last week of February 2020,” said IG CEO June Felix, “and client trading volumes have been exceptionally high.”
Like FTSE 100-listed Hargreaves Lansdown, IG offers a Stocks and Shares ISA platform for investors. But its main revenues come from the fees it collects from day traders.
Volatility is big business
When share prices are swinging around like they have been since the stock market crash, there are more opportunities to trade. Not to mention the number of furloughed UK workers now stuck at home twiddling their thumbs.
As a result IG company revenue, which is driven by transaction fees, has also been “exceptionally high,” it says.
Day traders aren’t like us long-term investors. Our credo — proven to build wealth over time — is to follow the likes of Warren Buffett or Terry Smith. We buy good companies, try not to overpay, and then hold our investments and let compounding do the heavy lifting.
Day traders seek to take advantage of very short-term price share movements. They might only hold a stock for a day or even a couple of hours, seeking to sell quickly for more than they bought.
Traders don’t just buy shares they think will rise in the short term. They also bet against, or ‘short’, shares they think will fall. They do this by spread betting or using a complex financial instrument called a CFD.
We can extrapolate to a reasonably strong degree that stock market volatility will continue. There is still a high degree of uncertainty about the future. Over a third of FTSE 100 companies have cancelled their dividends. Most have said there is not enough earnings visibility to produce any kind of guidance.
A third of the world still remains under some kind of government-mandated lockdown. And recent moves to cautiously re-open economies may have to be retrenched if coronavirus cases explode again.
IG the OG
Day trading is far too risky for me. Most uses leverage, where you borrow extra money from a broker when making bets to amplify your potential gains. Warren Buffett notably said: “It’s crazy in my view to borrow on securities. It’s insane to risk what you don’t have for what you don’t need.“
Quoting his investing partner Charlie Munger, Buffett added: “There is only one way a smart man can go broke — using leverage.“
However, I think you can still profit from investing in the market leader in this sector. I believe IG is way ahead of the competition, and the growth outlook for 2020 and into 2021 and beyond is extremely positive.
