Spread Betting Markets: Sectors and UK House Prices

You can trade entire industries with spread betting. Sectors can be seen as collections of the shares of companies that are in a particular market. For example, British Telecom, Telewest, and others all come under the sector called Telecoms. HSBC, Barclays, etc., come under Banking. Trades on UK sectors are based on the FTSE 350 industry groupings. Sub-indices are normally made up of companies in chosen industry groupings, such as mining, banks, insurance, technology and engineering. There are 48 of such sectors including the following -:

Sector spread trades allow you quick and easy exposure to an entire industry grouping. Traditionally, this is quite hard to achieve in the ordinary stock market, requiring you to buy stocks in each constituent of a sector in the right proportions. The list of recognized sectors is extensive and the list of sectors you can spreadbet upon includes the following:

  • Aerospace and Defence
  • Banking
  • Beverages
  • Chemicals
  • Construction
  • Electricity
  • Electronic and Electrical Equipment
  • Engineering
  • Food & Drug Retailers
  • Food Producers & Processors
  • Hotels
  • Household goods
  • Insurance
  • Investment
  • IT Hardware
  • Life Assurance
  • Mining
  • Oil & Gas
  • Oil Equipment
  • Retailers
  • Software
  • Speciality Finance
  • Tobacco
  • Transport
  • Utilities

Betting on a sector reduces the risk of being on the wrong side associated with selecting individual companies and this is good risk management although this also limits the upside if a single share moves sharply in your favour. As such if you think that retailers are due for a rally due to the Christmas season, you could place a trade on the retailers sector and your profit will depend on how the group of retailer stocks making up the index perform. Of course this also caps the potential returns should an individual company in the sector outperform the others in the sector. If the stock price of one company making the sector like for instance Next PLC experiences robust Christmas trading sales sharply outperforming its industry peers, the sector will likely rise on the back of this but it is Next PLC shares that will rise the most. So if you were long Next PLC, your profits would have been greater than if you were simply long on the retailer sector. Likewise, if you were short the sector, your losses would have been less than if you were short Next PLC.

Some sectors will affect others, for instance the Oil & Gas sector and its performance will impact most other sectors. This can be used in trading, as you can anticipate how price movements in one sector will be reflected in other sectors. IG Index, for instance offers spreadbetting on some 30 subsectors within the FTSE 100, FTSE 250 and FTSE 350.

Sectors act as a barometer for a particular type of industry. Just as you have market indices, such as the FTSE 100 or the Dow Jones Industrial Average, which indicate the overall state of the economy, sectors are concerned with one small part, but do not break down the financial markets as much as individual shares. They are sometimes considered a ‘safer’ option than betting on individual shares, as sector-industry movements are normally a mirror of wider trends impacting that industry and are thus less prone to short-term price fluctuations and market volatility, which makes speculating on individual shares very difficult.

You might have a strong opinion that supermarket shares are going to perform well over the coming months but do not know which particular retail stock to buy. Of course you could open a long trade on say, Tesco or one of its peers – but what you’re right about supermarkets but wrong in your selection of share? And don’t think this can’t happen… While stocks in the same industry grouping tend to move together over time, they can diverge considerably both over the short-term, and also over longer periods. Specific problems with, say, business at Sainsbury might cause its shares to underperform those of the FTSE 350 Food Retail sector as a whole. Sector Bets are an effective way of diversifying this stock specific risk.

Sector Spread Betting: How Sector Bets Work

Spread bets on sectors work like trading individual shares. Each individual listed stock belongs to a particular industry sector like mining, banks, technology..etc To eliminate the intricacies of stock picking you can take a position on a whole sector using a spreadbet. This eliminates the need to punt on the individual performance of any particular company within that sector. But let’s see how it works in practice:

Sector Example 1 : For instance if you thought that the retail index was in for some hard times, you could take a position on the retail index as a whole, rather than trying to seek out the individual companies that are likely to suffer. At IG Index you could do this by taking a position on the FTSE General Retailers index which is presently quoting the June contract at 1640/1650 and which can be traded for as low as 50p per point. If you made a spread bet for £10 per point and the retail index fell over the next few months to trade at 1524/1534, this would represent a profit of £1,060. [(1640 – 1534) x 10].

Sector Example 2 : Let’s assume that you want to take a punt on Britain’s industrial engineers given the weak pound that is helping to boost exports. You look at the FTSE 350 Industrial Engineering sector which is being quoted at 7,362 – 7,411 by one provider for the September contract. Thus, you can either buy the index at 7,411 or sell it at 7,362, so the spread between the buy/sell is about 0.7%. This spread includes the cost of financing the bet for the period up to September. If you place a spread bet at £1 a point on the September contract, then you’re basically exposed to £7,411 divided amongst the stocks making up the industrial engineering sector.

You can use sectors in a number of interesting strategies. For instance, you can use the sectoral indices to take advantage of seasonal trends, such as the propensity for the for the mining industry to outperform the wider market during the first quarter of the year, or electricity’s winning record in the third quarter. To do this you would basically open a trade in one sector and an opposite position in an index. So for instance if you believe that the mining sector will outperform the wider market during the first three months of the year, you would go long on the sector and short the FTSE 100 index. Another strategy that spread traders could exploit relates to trading indices via correlation plays – buying or selling the index and then selling or buying a sector. With this spread traders will be removing that sector from their index trade.

One downside that is worth noting about trading sectors is that spreads on sector indices tend to be wider than on individual stocks.

UK House Prices

Will house prices crash or won’t they? Who cares – You can make a pile either way…

Another interesting spread betting option, you can bet with many providers on the movement of the UK housing market prices, which is usually represented by the Standardized Average Price as reported by HBOS. This allows you to profit from the housing market without all the aggravation of buying a property, paying stamp duty, any upkeep and maintenance, and capital gains when you sell. Of course, you also have gearing and do not need to find the full value of the house in order to make gains.

Property Spread Betting: Betting on House Prices

Some people have used the availability of spread betting on house prices to hedge the value of their own home. For instance, if you foresee that the value of your home may fall, then you could take a short position, and even as house prices drop you will be making a profit from the spread bet, which will counter your loss in value. This would depend on the price of your house moving in line with the broker’s index, but it will help offset your losses.

For instance spread betting provider IG Index quotes house bets based on the Halifax quarterly index with each point making up £1,000 of value. Suppose, you are offered a bid-offer spread of 162/165 (which would be like saying average house prices of £162,000 and £165,000) for June 2011, you can sell the index at 162, in the expectation that average prices will fall.

Of course an alternative way to make money on falling house prices is to short specific UK house builders stocks via spread bets. Alternatively you can also use pairs trading like for instance shorting a housebuilder stock (or even the entire sector) while going long on the FTSE 100 at the same time. That’s basically a bet that a particular company or the entire building industry will underperform the wider market.

Keep an eye on interest rates if you want to cash in on the crashes. An obvious corollary of the house-price market is interest rates, but the Bank of England seems intent on flagging any possible moves so far in advance that it leaves little room for making any money.