Shares in SIF Portfolio holding Plus500 closed down by 28% on Tuesday, after the FCA announced plans to restrict leverage for retail investors.

In this week’s article, I’ll consider the potential impact of this news on profits. Should I sell Plus500 now to avoid the risk of further losses?

I’ll also take a passing look at Plus500’s more upmarket UK peers, IG Group and CMC Markets. Both companies fell by more than 35% on the news, but are seen as higher-quality operators. Are they now cheap enough to deserve a closer look?

What’s happened?

The FCA has analysed trading data from spread betting/CFD firms and found that 82% of these firms’ retail clients lose money. A particular concern is that investors with little experience are able to access very high levels of leverage.

The FCA found that some products allow clients to trade positions worth 200 times more than the deposit they’ve placed. The regulator is now proposing a leverage limit of 25 times for investors in their first year of CFD trading, and 50 times thereafter.

In my experience, the leverage levels available on indices and FX are much higher than those on equities. For example, IG currently allows customers to trade the FTSE 100 with a margin of just 0.5% for positions of up to 155 points. That’s equivalent to leverage of 200 times on positions worth up to about £1m. It means that a 5% fall in the value of the FTSE will result in a loss of ten times your initial deposit.

The FCA has decided that the best way to protect retail punters is to reduce the differential between deposit size and potential losses. This is expected to put a dent in the profits of CFD firms, especially at the lower quality end of the market.

The impact on Plus500

Here’s what I said about Plus500 when I added it to the SIF portfolio in September:

“Plus500 has high quality and momentum but a lower value rank. This is the profile of a high flyer. These are stocks that can deliver terrific multi-year gains, but can also crash horribly if things start to go wrong.”

Plus500 shares have fallen by almost 40% in the last week! Tuesday’s 28% fall was preceded by a 10% drop last week when the Cypriot regulator (CySec) announced…

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