Another stock market crash could be on the cards. The FTSE 100 and other UK indexes opened lower today after China announced the US consulate in Chengdu is to close. The move was in response to the US closing a Chinese consulate in Houston.
Increasing tensions between two economic superpowers is never a good thing for the markets; especially with the coronavirus pandemic still not under control. Traders will be watching for and reacting to signs of escalation in US-China tensions and coronavirus cases. Stock markets are likely to be volatile, and a plunge in share prices cannot be ruled out.
Thriving on volatility
Volatile markets are, however, a good thing for a few stocks. CMC Markets (LSE: CMCX) and Plus500 (LSE: PLUS) are in the online trading business. When the coronavirus pandemic sent the stock market crashing earlier this year, new users signed up in droves to trade on CMC and Plus500’s websites.
Those people signing up for online accounts were drawn in by the volatility in the stock market. The belief is that choppy stock markets and fast moves in share prices are what make overnight fortunes. Here at the Motley Fool we caution our readers against day trading. Instead, we encourage a long-term view and diversified portfolios of stocks. But, day traders signing up en masse is a boon for CMC and Plus500.
Traders who enter and exit trades multiple times a day generate a lot of commissions for their brokers. CMC and Plus500 have benefitted enormously from a surge in online trading in both existing accounts and new ones. Plus500 posted a record level of half-yearly customer income in 2020, of $556.9m, compared to just $175m for the first half of 2019. CMC also had a record pre-tax profit of £98.7m for its fiscal year ended 31 March (£6.3m 2019). CMC increased its earnings per share from 2.0p in 2019 to 30.1p in 2020: that’s a 1,405% change.
Market crash opportunity
Unsurprisingly, this stellar performance has not gone unnoticed by investors. The CMC share price is up 247% in a year, and Plus500 stock is up 87% in a year. However, it might not be too late to benefit from a business model that thrives when markets are volatile.
If the coronavirus inspired stock market crash brought increased trading activity to both firms, in both new and existing accounts, then it is reasonable to assume other causes of volatility will do the same. Rising tensions between the US and China could cause the stock markets to get very jittery, and this could be good for Plus500 and CMC.
If I had to choose one of the two stocks to invest in right now, it would be CMC. Both businesses generate plenty of cash, are not capital intensive. and have low levels of debt. However, Plus500 deals exclusively in contracts for difference, which appeal mainly to retail traders. CMC Markets has a slightly more diverse customer base.
Both companies should benefit from increased stock market volatility, and either might make a diversifying addition to a portfolio in these turbulent times in the markets. But, investors should be aware that the fortunes of the companies might change if the markets return to a state of calm.
James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.