IG Group is a Business that facilitates the buying and selling of shares and other financial instruments by private investors (PIs). PIs cannot buy and sell directly, they have to go through a Regulated Broker (such as IGG).
It started off as a spread bet firm. Here investors don’t buy the underlying shares, but just bet whether they are going to go up or down.
The two main advantages of spread betting are firstly that it is classed as gambling, so there is no tax for PIs to pay on profits (you can’t reclaim taxes on losses either, obviously – and it’s estimated that 80% of private investors lose money. I’ve got better over the years, but early doors I can attest to that).
The second advantage is that you don’t have to pay all the money. If you buy (say) £10,000 of shares you have to spend £10,000 plus costs. If you are betting on £10,000 of shares you only have to put down (say) 20%, so £2,000. That way you can bet on more share value than you have in cash. This is known as gearing (or leverage in the US). If the price movement goes against you, you have to add to this cash to protect IG (or its equivalent).
A similar concept is when buying a house. If you want to buy a £500,000 house you have to spend £500,000. If you don’t have that you might put up £100,000 and borrow £400,000. If the house price rose 10% to £550,000, your £100,000 is worth £150,000 (on paper at least) – a 50% gain. On the other hand, if it dropped by 10% it is only worth £450,000 – your £100,000 is only worth half what it was. This could even be wiped out – in the 1980’s housing crash a lot of people bought overpriced (at the time) properties with high value mortgages, only to find the house worth less than the mortgage (negative equity) when house prices plummeted.
IGG won’t let that happen. They make you top up their investment to cover themselves. If that is not possible they ‘close your position’, realising any losses before you run out of buffer cash (you are still liable for any losses if they don’t close in time). This is why PIs lose money as they overextend themselves and don’t have the resources when they need to top up, and close out at a loss instead. Rinse and repeat.
Anyway, IGG takes a cut whether PIs bet on an increase or a decrease, so make a profit whatever the price is doing *. It’s a numbers game. The margins are small, so lots of investors trading more = more profit. Market volatility is good, and we certainly have that at the moment. I’ve bought some for the portfolio.
* If you have watched “Trading Places” this is exactly how Duke and Duke (IG Group equivalent) make all their money, then lose it when a massive bet (based on false insider information) goes horribly wrong. If they had stuck to taking a commission they would have been fine. Towards the beginning of the film Eddie Murphy’s character gets a schooling on how Brokers make their money.
Buy price: £6.64
Dividend Yield: 7%