This is where betting on a sector can come in useful as it allows you to take a broader view. The way sector spreadbetting works is that an investor wins or loses depending on how a group of shares perform; you don't need to predict the share that is likely to outperform a sector; thus sectors empower investors to punt on broad trends. Also, sectors bets are often safer as they don't experience the wild swings of individual stocks; for instance in the last years it was a common sight to see a stock moving some 5% to 10% or more in just one day, however sectors can offer less volatility than individual shares in that they don't usually move more than 2% on a daily basis. This is because while bad news can have a marked effect on a company's share price, the effect on a sector is usually diluted unless the whole market is moving down.
The FTSE 350 Index of UK shares is a useful starting point, because it is divided into sub-indices. For example, a punter who uses a spread-betting service such as IG Index can speculate on the FTSE 350 Banks sector, which includes the likes of Lloyds TSB, Standard Chartered, HSBC and Barclays.
A bearish investor who believes that the current credit crunch will eventually engulf British banks could bet that the index will drop from a bid-offer spread of 10,270/10,330 (as recently offered) to say, 10,200/10,250. If he sells at 10,270 and closes the bet at the offer price of 10,250, he makes 20 points. At a bet of, say, £5 a point, that is a profit of £100. Of course punters should prepare for an adverse price move by agreeing to close out a bet at a pre-arranged level. Such spread betting is free of stamp duty and can be done online.
While he might be bearish about banks, the hypothetical punter might expect retailers, particularly sellers of everyday household items, to fare relatively well compared with other sectors if the economy cools off. The reason: people will continue to buy basic items such as groceries.
The FTSE 350 General Retailer sector includes companies such as WH Smith, the stationers and bookshop; Alliance Boots, the pharmacy and beauty products retailer, and J Sainsbury and Tesco, the supermarket giants.
The investor could punt £5 a point, for example, that the FTSE 350 retailer index rallies from around 2,316/2,330 to say, 2,350/2,364, buying at 2,330 and selling at 2,350, a 20-point, or £100 pound gain.
The advantages of sector betting is that investors can spread risks without the chore of researching hundreds of individual shares, points out Simon Brown, chief executive of ProSpreads, a spread-betting business. "Those [punters] that trade equities often stick to a sector because they are familiar with it and how it reacts to certain kinds of news," he adds. By placing a spread bet on a sector, traders can trade a trend without leaving themselves exposed to the possibility of an unexpected jump or fall in the share price of one specific company.
But there are also problems. For a start, an investor concerned about the credit crunch who sells the whole banking sector will miss out the fact that some institutions, such as HSBC, are highly exposed to the credit crunch, while others, such as Lloyds TSB, don't seem to be.
Punters should check the make-up of each sector because one company can account for a relatively high proportion of an index's total value and hence distort it. In the FTSE 350 Chemicals index, for example, ICI -- currently a takeover target and hence enjoying highly valued shares - makes up a relatively high weight, with only three other businesses in the index: Victrex, Johnson Matthey and Croda.
Sector betting makes it easy for investors with strong views but little time or inclination to pick individuals firms to put their money where their mouth is. But they should always remember that there are no real short cuts in wealth management.
Gibson from Galvan Research and Trading says that a problem with sector betting is that that because the sector indices comprise so many different components, it is more difficult to conduct any fundamental research on them. 'The banking sector, for example, contains Asian-dominated companies such as HSBC and international businesses such as Barclays and RBOS, as well as the largely mortgage-based UK banks, all at different weightings,' he says. 'This makes the fundamentals pretty hard to assess, so people can only really trade them technically.'
Also, since sectors are cap-weighted as like the main FTSE index means that potentially a few large constituents can dominate a sector's performance as is the case with GlaxoSmithKline (GSK) and AstraZeneca (AZN) in the pharmaceuticals sector.Betting on Sectors: Sector Investing
Aerospace & Defence
Construction & Building Materials
Electronic & Electrical Equipment
Engineering & Machinery
Food & Drug Retailers
Food Producers & Processors
Forestry & Paper
Household Goods & Textiles
Information Technology Hardware
Leisure, Entertainment & Hotels
Media & Photography
Oil & Gas
Personal Care & Household Products
Pharmaceuticals & Biotech
Software & Computer Services
Speciality & Other Finance
Steel & Other Metals
To get an overview of a sector's constituents you can also go to http://www.selftrade.co.uk/market-data/uk-shares/sector-list.php.
Looking at the above market sectors it is easy to see which market sectors would have a knock on effect on another. Some sectors such as Oil & Gas would have a knock on effect to most areas.
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