What is sectors trading and how does it work?

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).

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.

Six steps to trading sectors

1. Decide how you’d like to trade sectors
2. Learn how the sectors market works
3. Open an account
4. Build a trading plan
5. Choose your sectors trading platform
6. Open, monitor and close your first position

Decide how you’d like to trade sectors

The first step towards trading sectors is to trade CFDs.

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 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, 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 CFD account:

1. Banks
2. Food and drug retailers
3. FTSE 250
4. General retailers
5. Household goods and home construction
6. Mining
7. Oil and gas producers
8. Pharmaceuticals and biotechnology
9. Real estate investment trusts
10. TechMARK

Sectors trading examples

You can trade sectors via 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 CFDs.

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.