The stock market consists of groups of shares. A group of shares can be evaluated based on industries. The lingo in the share market refers to the industries as sectors. A sector can include, financial, industrials, energy, discretionary, communications, technology, staples and utilities. While you might not believe the broader market will rise or fall, you might have a view on a specific sector. Having a way to trade a sector or a specific industry provides you with several different trading opportunities. Additionally, you might even consider trading one sector versus another.
Why Trade a Specific Sector
Different aspects of the economy will drive the price of a specific sector more than others. For example, when the price of crude oil or natural gas increases or decreases, this will have a direct effect on the energy shares sector. When interest rates climb, generally the banking or financial sector outperforms. When interest rates fall, the utility and real-estate sectors usually benefit. By having the ability to pinpoint a specific sector to trade based on a change in some part of the economy is advantageous.
An Example of a Sector Impetus
An example of when you might consider trading the energy sector based on an impetus would follow the Energy Information Administration inventory report or the American Petroleum Institute inventory report. Monthly there is also the OPEC energy report as well as the International Energy Agency outlook on energy. When new information becomes available, a sector such as the energy industry will reevaluate its price levels.
How Can You Trade Sectors?
The most common way to trade a sector is to use a sector exchange-traded fund (ETF). Many reputable brokers even provide CFDs on ETFs. You can purchase or sell an ETF to trade it directionally. You can also trade an ETF against another ETF or an index.
For example, you might believe the energy ETF will outperform the broader markets. While you think there will be outperformance, you might not think the energy sector will rise. One way to play this trade is to purchase an energy sector ETF, and simultaneously sell the S&P 500 index.
This will create a market neutral trade which is often called a pair-trade. You can also create a pair trade on ETFs. For example, you can purchase the financial sector ETF and simultaneously sell the utility ETF. This trade is generally not affected by the overall movements of the broader market. This trade instead moves as the sectors change in value relative to one another.
The stock market is broken down into different industries called sectors. While some sectors move in tandem with the broader market, most have a different stimulus that will drive the price of a sector. You can trade sectors by using a sector ETF. You can trade these directionally, by looking for a specific impetus or you can trade them as a market neutral trade. A market neutral trade is often called a pair-trade.