There’s one word to describe the market action of the past few weeks: volatile. And it’s likely that volatility will prevail for the next week or so, no matter what the outcome of the EU referendum, which means traders are now licking their lips at the potential profits they can make in the markets.
Short-term traders thrive off volatility. Wild market swings mean more trading opportunities and more opportunities equals more profit — for good traders, anyway. For the brokers, more trading translates into higher revenues in the form of charges and commissions.
The management of IG (LSE: IGG), one of the UK’s largest spread betting and CFD providers, knows exactly how profitable volatile markets can be for the group. Back in mid-2008, as the financial crisis was just starting to unfold, the company reported a 51% jump in revenue and 40% jump in profits for the first six months of the year.
Further, as concerns about the state of China’s economy and Greece’s woes rocked markets around the world last year, IG saw a similar jump in sales, albeit from a higher base. Over the three months to August 2015, revenue jumped 24% and active client numbers increased 19%.
As trading firms like IG take on virtually no risk, the company has been able to grow steadily over the past decade despite the volatility and changing financial landscape. IG reported a 0.9% decline in profits for the first time in a decade last year, after the sudden appreciation of the Swiss franc cost the group £27m. Barring this one hiccup, IG’s growth has been unstoppable.
For the year ending 31 May 2016 City analysts expect the company to report earnings per share growth of 7%. On this basis, shares in IG are trading at a forward P/E of 18 and support a yield of 3.4%. The payout is covered-one-and-a-half times by earnings per share.
Impressing the market
CMC Markets (LSE: CMCX) has only been a public company since February, but the company’s shares have already returned 16%, outperforming the FTSE 100 by 7.1% over the same period.
At the beginning of June, the company published its maiden set of full-year results as a public company and revealed that net operating income rose 18% year-on-year to £169.4m. The number of trades hit 66.8m, from 44.6m, and the value of trades hit £2,071bn, up from £1,626bn.
These impressive figures led management to hike the company’s dividend payout by 56% to 8.9p a share, from 5.7p. City analysts expect CMC to report earnings per share of 18p for the year to March 2017, which implies that the company’s shares are trading at a forward P/E of 15.4.
Controversial trading firm Plus500 (LSE: PLUS) has always prioritised shareholder returns and a flurry of trading around the EU referendum could result in the company issuing a special dividend to investors.
City analysts already expect the company to return 49p per share in dividends to investors this year for a yield of 8% at current prices. Plus 500 currently trades at a forward P/E of 8.6.
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Rupert Hargreaves 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.