Analysts at Liberum have lowered their share price expectations for Plus500 (PLUS:AIM) after the Cyprus regulator issued new guidance on how leveraged financial products can be marketed and sold.
Plus500’s share price fell just over 10% on 1 December as markets started to pick up on the news which includes a ban on bonus payments that encourage retail clients to trade and a smaller default leverage setting.
Similar companies on the stock market in the CFD space also saw share price weakness including IG (IGG) which fell 5.8% on 1 December and CMC Markets (CMC) slipped 0.2%.
Plus500’s shares fell another 1.2% to 533.5p in early trading on 2 December.
Investors are clearly worried that the proposed measures could be rolled out to developed European markets. Liberum says such an event could have a ‘very serious negative impact on profitability for the entire industry’.
At the moment, the new guidance only relates to Plus500 among the UK-quoted contracts for difference (CFD) providers as it is the only one regulated in Cyprus. IG and CMC are regulated by the UK authorities.
Liberum’s analysts have downgraded their share price target for Plus500 from 803p to 723p to reflect the higher risks to its business. That’s despite Plus500 issuing a statement saying it didn’t believe the guidance to Cyprus investment firms would have a material operational or financial impact on the company.
The amount of leverage a customer can take on a CFD transaction makes a big difference to the potential profit for the financial services provider. The bigger the bet, the more the likes of Plus500 and IG stand to make if the customer loses.
Cyprus has guided for maximum default leverage limit of 1:50 although the client has the option to increase this level. That means a customer would initially only get up to 50 times leverage on the various instruments on offer.
