First of all, the financials displayed above are
exceptional in terms of share value, so much so that after their financial results were released in March, Plus500 (ticker symbol - PLUS) catapulted to the
very top of our rankings for April. Now we need to find out if there any skeletons in the cupboard to stop us from buying this company.
Before we can do that, we want to understand Plus500 as a business, so what on earth is a 'CFD' and why did Plus500 made so much money from them in 2020?
A CFD (or contract for difference) is an agreement between a buyer and a seller that says the buyer must
pay the difference to the seller between the
current value
of something and its
value at the end of the contract.
CFDs basically allow investors to make money from
movements in price
without actually owning the underlying asset. Accordingly, the CFD does not take into account the underlying asset's value, only the
change in value between the entry price and price at the end of the contract.
In very simple terms, say Max is going to
buy a CFD for the share price of
Tesla. He believes the share price is going to increase from £500 to £600, so he buys
100 contracts
at
£500 per share (making the current trade value
£50,000). If he is
right and the
price does go up to £600, the final trade value will be
£60,000 and he's just made himself a quick
£10,000! But, lo and behold, the share price crashes down to
£300 per share, meaning the final trade value is
£30,000
and poor old Max has
lost £20,000.
This is why Matt and Joe leave it to
Max to trade CFDs. However, it turns out a
growing number of people want to use CFDs. Plus500 makes money through trading fees and brokerage fees from customers who deal these contracts; the more customers that use their platform, and the more active they are, the more money Plus500 makes.
Plus500
grew its
customer base by
over 300% from 2019 to 2020 - we believe this is a combination of a bull market, increased hype around options, forex and bitcoin trading, and Plus500's platform being
more attractive than its competitors.
Over the last financial year, the 200,000
new customers and
high customer retention saw Plus500 grow its revenue by
146% and its cash balance by
103%.
Have you ever heard the phrase, "During a gold rush, you can either
dig for gold or
sell pick-axes"? Well we see this as a potential opportunity of profiting from the emergence of retail CFD investors, rather than joining them ourselves.