Shares in IG Group(LSE: IGG) have slumped by over 25% today following news that the industry regulator is set to impose restrictions on the CFD and spread betting industry. They could cause the profitability of the company and its peers to come under pressure in the short run as they adapt to the new rules. But could this mean that IG Group is worth buying for the long term, since it trades on a much lower valuation?
A changing industry
The financial regulator, the FCA, has decided that the way in which CFD and spread betting products are marketed must change. Therefore, IG Group and its peers will no longer be able to entice new customers with bonus payments or other similar offers. This could hurt the way in which they acquire new customers and may mean that they find marketing more difficult in the short run. However, in the long run the chances are that the company will be able to adapt to the new rules and find new means of convincing potential customers to sign up with them, rather than their rivals.
The FCA will also implement a cap on leverage for new and more experienced clients. Traders with less than a year of experience will see their leverage capped at 1:25, while all clients will be able to access a maximum leverage ratio of 1:50. This seems like a sensible move and shouldn't hurt profitability to a great extent, since the products offered by IG Group will still hold appeal for clients seeking to maximise their returns.
A standardised risk warning and mandatory disclosure of profit-to-loss ratios will also be required. This should help traders to better understand their performance as well as the historical performance of the products they're using. As such, it's likely to provide greater consumer protection in future.
Strength but volatility?
Clearly, the market has reacted negatively to today's news. However, it must be said that changes to regulations that help to protect consumers are a good thing. And with IG Group being one of the biggest operators in the sector, it has the financial resources to successfully adapt to the new regulations. Therefore, on a relative basis it should be able to perform well.
In terms of its appeal, it would be unsurprising for its share price to fall further in the coming days. In addition, a downgrade to its guidance is also on the cards, with it likely to take time for the company to figure out how to maximise profitability within the new industry landscape.
However, for long-term investors it remains a lucrative space in which to invest. IG Group's products are still likely to be attractive and its performance in future years should remain sound. And with it trading on a price-to-earnings (P/E) ratio of 12.3, it could prove to be a strong, albeit volatile, long-term buy.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.