What is sectors trading and how does it work?
With sectors trading, you can take advantage of upward or downward price moves in a specific industry. IG offers 10 sectors including banking, mining and general retailers. Find out how it works and how you can start trading.
What is sectors trading?
Sectors trading is used by traders who want to gain exposure to a specific area of the economy, for example the oil and gas sector. With sectors trading, you can get exposure to a basket of related stocks – from the same index and industry – with a single trade. This enables you to go long or short on the sector as a whole without buying and selling companies’ individual shares.
If you’re analysing the economy and spot an opportunity in a specific industry – opposed to a specific stock or index – you can back your judgement while protecting yourself against spikes of volatility brought on by company-specific events.
How does sectors trading work?
Sectors trading works because you are speculating on the price of a basket of related stocks, without taking ownership of the underlying shares. This means you can go long if you think the price will rise or short if you think it will fall, reflecting the changes you expect to see in your chosen sector. You can trade sectors with contracts or difference (CFDs) or spread bets.
It is important to remember that if stocks in a certain sector experience price movement, the price of the index will represent the move. However, each stock has a different weighting within the sector index. A small move in the price of a stock with a larger weighting could therefore have more of an effect than a large move in a company with a small weighting. For this reason, you should make sure you understand the composition of your chosen index.
Decide how you’d like to trade sectors
The first step towards trading sectors is to decide whether you want to spread bet or trade CFDs.
Trading sectors using spread bets
Spread betting is a method of trading that can be used to speculate on the price of a sector index, without taking ownership of the shares it contains. When you open a spread betting position, you bet an amount of money per point on the direction that you believe the sector’s price is headed. The more the market moves in your favour, the greater your profit. The more the market moves against you, the greater your loss.
Spread betting is a popular choice among traders because you don’t pay tax on your profits.1
Trading sectors using CFDs
A CFD is a contract in which you agree to exchange the difference in the price of a sector from when you first open your position to when you close it. You can control your position size by deciding how many contracts you wish to trade. Like spread betting, you are speculating on the price of the market, rather than taking ownership of the shares in the sector.
CFDs are liable for capital gains tax, but you can offset any losses against your profits for tax purposes.1
Learn how the sectors market works
Each sector has its own intricacies, setting it apart from other markets. For this reason, you should make sure you understand your chosen sector before you start trading. It’s also very important to understand the composition of the index and how the price will move – as it will adjust in response to individual share price changes, varying by their weighting.
Open an account
All you need to do to start trading sectors is open a spread betting or CFD trading account. With IG, you can open an account in minutes, and there’s no obligation to add funds until you want to place a trade.
Build a trading plan
As with any other market, you need a trading plan when you decide to trade sectors. A solid plan can help you make logical trading decisions under pressure because it defines the parameters of your ideal trade. It could also help you to avoid making emotional decisions.
Your trading plan should also include a risk management strategy to protect against unnecessary losses. One way in which you can minimise your risk includes attaching stops to your positions. Stops will close your trade once the price hits a certain level and protect your trade from unnecessary risks.
Choose a sectors trading platform
Our trading platforms aim to provide a faster way to trade sectors. Get personalised alerts, interactive charts and built-in risk management tools to help you trade smarter. You can trade via the IG trading platform using:
- Your web browser
- One of our mobile apps
- Advanced third-party platforms
Open, monitor and close your first trade
When you trade sectors with CFDs or spread bets, you can speculate on both rising and falling industries. If you think the overall price of a sector will rise, you would open a position to ‘buy’, and if you think the price will decline, you open a position to ‘sell’. Your trading decision should be based on your analysis of the market and your trading strategy.
After you have opened your position, it is important to monitor its progress and to keep up to date with anything that could impact the price of the sector.
What sectors can I trade?
You can trade 10 different sectors with a spread betting or CFD account:
- Food and drug retailers
- FTSE 250
- General retailers
- Household goods and home construction
- Oil and gas producers
- Pharmaceuticals and biotechnology
- Real estate investment trusts
Sectors trading examples
You can trade sectors via spread bets or CFDs – leveraged products that enable you to open a position on a sector by putting down just 10% of the value of your trade up front. While this will magnify your profits, your losses will be magnified too.
Below are examples of sectors trading via spread betting and CFDs.
Sectors spread bet example
Say TechMARK is trading at 4858 with a sell price of 4853 and a buy price of 4863. You anticipate that this sector’s shares are going to rise in the next few days due to new software developments by one of the constituent stocks. You decide to go long and buy the sector for £10 per point of movement at 4863 with a daily funded bet (DFB). The margin factor is 10%, so you only have to put up of the total exposure of the trade (10 x 4863 = £48,630), which is £4863.
If your sectors spread bet was correct
After seven days, TechMARK has indeed moved in your favour and the sector is now trading at 4908 with a sell price of 4903 and a buy price of 4913. You decide it’s a good time to close your trade. To do this, you reverse the trade by selling at the sell price for £10 per point of movement. This means you’ll be coming out with a profit of £400 ([4903 – 4863] x 10) minus daily funding charges.
If your sectors spread bet was incorrect
After seven days, TechMARK has moved against you and the sector price has dropped to 4813 with a sell price of 4808 and a buy price of 4818. You decide to close your trade. This means you’ll suffer a loss of £500 ([4818 – 4863] x 10). You also have to pay the daily funding charges.
Sectors CFD example
Assume you expect the mining sector is going to experience a dip. The underlying market price is 1572, with a sell price of 1567 and a buy price of 1577. You open a CFD account and you go short on five contracts. The margin factor is 10%, so your margin would be 10% of the total exposure of your trade (5 x 1567 = £7835), which is £783.50.
If your sectors CFD trade was correct
After 10 days, the market has indeed fallen and you decide to close your position when the sector is trading at 1487 with a sell price of 1482 and a buy price of 1492. You do this by reversing your trade – in this case, by buying five at the new price of 1492. To calculate your profit, multiply the difference between the closing price and the opening price of your position by its size. The calculation is 1567 - 1492 = 75 points, which you multiply by five contracts to get a profit of £375.
If your sectors CFD trade was incorrect
After 10 days, the market has moved against you and is now trading at 1627 with a sell price of 1622 and a buy price of 1632. You decide to close your position by buying five contracts at a new buy price of 1632. To calculate your loss, you multiply the difference between the closing price and the opening price of your position by its size. The calculation is 1567 - 1632 = -65 points, which you multiply by five contracts to get a loss of £325.
If you’re knowledgeable about the financial markets and actively trade them, sectors trading could be an essential part of your strategy. It gives you the opportunity to deal on different sectors without the need for large amounts of money to get started. Read more about the benefits of sectors trading.
You can use CFDs and spread bets to trade sectors. CFDs and spread bets enable you to go long or short (speculate on rising or falling prices). You trade using leverage, which means you only have to put up a small deposit (margin) to gain access to the full value of the trade. While this will magnify profits, it will also magnify losses.
When trading sectors via spread betting or CFDs, you only pay a spread (the difference in price between the buy and sell prices quoted), as well as daily funding charges.
Indices trading is the means by which traders attempt to make a profit from the price movements of an entire index – for example the FTSE 100, which is made up of companies from many different industries. Sectors trading involves speculating on the price of an index that’s made up of companies from one specific sector only.
The minimum contract size for sector CFDs is one contract. One contract represents a set quantity of the underlying asset. In the case of sectors, one standard contract is equivalent to £10 per point of price movement. Traders can control their position size by adjusting the number of contracts they are trading.
The minimum bet size for sectors is £0.50 per point. The bet size is the amount you bet per unit of movement in the underlying market. You can choose your bet size to manage exposure, as long as it meets the minimum requirement.
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