Plus500 Ltd And The Danger With Small Caps

Plus500 Ltd (LON: PLUS) was meant to be the perfect investment…

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

This one really got to me. I mean, it really did.

It was meant to be the perfect investment. I like investing in small caps, because I know the potential for good returns is far better than with blue chips.

Impressive growth

After all, blue chips are already big companies, so they are likely in the future to just get a little bit bigger (or, quite often, a little bit smaller), whereas small caps start from zero, and then just keep on growing. So if you can spot these companies early enough, you can achieve incredible, multi-bagging returns.

This was, I felt, the case with Plus500 (LSE: PLUS). When I bought in at 470p during the autumn of last year, I knew I was bagging a bargain. This was a company that I could see was going places. Check the historic earnings per share progression and you will understand what I mean: 2012: 10.46p, 2013: 28.50p and 2014: 57.18p. Impressive? I thought so.

Plus500 is basically an online trading platform through which you can buy and sell contracts for difference (CFDs). These are financial derivatives that allow you to go long or short on a stock. It brings the type of trading financial professionals are familiar with to the masses. And as such, I think it’s a great idea and a good company. Also, it was trading at a  single-digit P/E ratio, and had a dividend yield of 7%.

So I bought in. And when the share price started to rise, I knew I was onto a winner.

So how should you invest in small caps? Well, my technique is to buy when the company is oversold and a clear bargain (as was the case last year). Then, by looking at the charts and watching how the share price changes and the valuation evolves, I set myself a sell price.

My sell price with Plus500? 700-750p.

An opportunity missed

The thing is, when you have a successful investment you just want to let it run. If it breaks through 700p, maybe it can make 800p or even 1000p. And even at this high price, Plus looked cheap.

So when I was just reaching my target price, I was thinking of selling but wavered a little. And, to be honest, when you’re busy with a full-time job you don’t always have time to think through your investments. And then the price crashed.

In one day I lost, shall I say, quite a lot of money. But I was clever enough to buy in at the bottom and sell at the top of the dead-cat-bounce. So, overall, I actually made a little money. But I could — and perhaps should — have made a lot more.

The share price fell because the company found some accounts were being used to launder money. And then, as often happens, the firm’s board panicked and sold the company to a competitor at a knockdown price.

I never get emotional when these things happen. I just sold the shares and bought into Fidelity China instead. It was no harm done, just an opportunity missed. In investing, if you can profit from just 25% of the opportunities you spot, you are doing well.

What lessons have I learnt?

So what lessons can I draw? Well, if you have a sell target, stick to it and never waver. It is much better to sell early and lose a bit of money, than sell late and see the trade fall through. And if it does fall through, never get emotional. Just move on to the next investment. Small-cap investing can be profitable, but it is also dangerous.

There is no such thing as a grand plan in investing. It is not about far-fetched dreams, aspirations and brilliant thinking. It is about working hard, grafting and making money where you can. And a lot more than we like to admit is down to luck.

You see, there is no such thing as the perfect investment. You either make money, or you don’t.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »