IG Group (LSE:IGG) is a FTSE 250 listed financial services company. IG Group shares might only be up 16% over the past year, but if I look back over two years, growth of 72% has been seen. There are several reasons why I think the company is heading in the right direction and I’m looking at buying some shares.
Attractive business fundamentals
The bulk of revenues for IG comes from clients spread betting on financial assets. If I thought the FTSE 100 index was going to rise, I could place a trade with IG that for every point the FTSE 100 went up, I would make £1. If it fell, I would have a loss of £1 per point. This is the nature of spread betting.
IG has gained a large market share in this area, thanks to offering a wide range of assets that people can spread bet on. During the last financial year, it saw a 27% increase in new clients. This new client growth is one reason I think IG shares have been moving higher.
IG also offers more traditional share-dealing services and ISA provision. Through all of these services, it has a relatively low cost base as it relies on technology for the platform. There are no physical locations or expensive overheads to really consider. As a result, the operating profit margin is high. In the last report, it saw revenue of £853.4m with profit before tax of £450.3m. That’s over 50% of turnover that was translated into profit!
Another point I like about the company is the expansion into new markets. It recently purchased Tastytrade, a US-based brokerage. IG will benefit from getting more access to US clients. Tastytrade also provides access to alternative trading tools for investors, such as Options. These kind of trading products have become very popular with retail investors over the past year. By acquiring Tastytrade, IG benefits from this.
Manageable risks for IG Group shares
Like any business, there are some potential risks that I see. IG Group shares plummeted 45% back in 2016 in just a few days after the FCA announced tougher regulations on spread betting. There is the potential for this to tighten further, given the surge in retail activity since the pandemic.
Although further restrictions could mean a hit to financial results in the short run, I don’t think it’s extremely serious. The share price bounced back from the news in 2016 and is now trading higher. Having a long-term investment horizon is of benefit in situations like this.
Another risk is that IG Group shares are simply riding the wave of favourable markets. The stock market crash followed by a sharp move higher has allowed many new investors to see a profit from buying during the crash. Going forward, it’s likely that the trading activity will slow somewhat, but I still feel that the customer base that has been built up during this period could boost long-term success.
On balance, I think both risks are manageable and don’t materially change my overall viewpoint. The tremendous growth at the company looks set to continue, so I’m considering buying some shares to ride this higher.
