CFD Tutorial - How is it Possible to Trade Sectors Using Contracts For Difference (CFDs)?
Many people ask the question what is a sector CFD and how can I trade it? To understand how it is possible to trade a sector CFD its important to understand how the market is put together.
On the Australian market you have over 1900 stocks available to trade.
Each of these stocks is allocated to a particular sector in the market.
For example the banking stocks all belong to the Finance sector.
The telecommunications stocks belong to the telco sector and information technology stocks belong to the info tech sector.
On the Australian stock market it is not actually possible to trader a sector.
This product cannot physically be traded on any market except through a CFD broker.
So how is it that you and I can trade sector CFDs? The sector CFDs are generally provided by and created by market-maker CFD brokers.
The first company in Australia to offer sector CFDs was CMC markets.
CMC markets wanted to create a product that enabled their clients to trade at very low levels of leverage and get access to a particular sector.
The financial sector for example was available at 1% margin and commission free.
So how does a CFD broker hedge themselves when trading sector CFDs? If you would trade a $100,000 finance sector CFD position the broker would calculate that $100,000 in the financial sector represents so many CBA, so many NAB, so many ANZ and so many Westpac shares and the algorithm would check that the quantity of stock is available in the real market.
If the stock is available then you're able to trade that position and if that stock is not available then the CFD broker may requote you.
Due to the fact that sector CFDs cannot be traded, a CFD broker would actually have to go in and physically by the equivalent stock that represents your CFD sector position.
This is the reason why sector CFDs cannot be traded in the first 15 minutes of the day and the last 10 minutes of the trading day.
What should you look out for when trading sector CFDs? While sector CFDs are a great product to trade you need to understand all the ins and outs of this product.
The two biggest issues you need to consider before trading sector CFDs are the overnight financing rate, which can be as large as the RBA plus or minus 4%, and the large spread that can sometimes be found of the sector CFD.
The spread is the difference between the first buyer and the first seller and can sometimes be up to 20 points on a sector CFD.
As a result you may find this product extremely difficult to intraday trade and instead you may need to trade sector CFDs on a longer time frame.
This now means you need to take into account the overnight financing charge to see if this product is right for your personal circumstances.
On the Australian market you have over 1900 stocks available to trade.
Each of these stocks is allocated to a particular sector in the market.
For example the banking stocks all belong to the Finance sector.
The telecommunications stocks belong to the telco sector and information technology stocks belong to the info tech sector.
On the Australian stock market it is not actually possible to trader a sector.
This product cannot physically be traded on any market except through a CFD broker.
So how is it that you and I can trade sector CFDs? The sector CFDs are generally provided by and created by market-maker CFD brokers.
The first company in Australia to offer sector CFDs was CMC markets.
CMC markets wanted to create a product that enabled their clients to trade at very low levels of leverage and get access to a particular sector.
The financial sector for example was available at 1% margin and commission free.
So how does a CFD broker hedge themselves when trading sector CFDs? If you would trade a $100,000 finance sector CFD position the broker would calculate that $100,000 in the financial sector represents so many CBA, so many NAB, so many ANZ and so many Westpac shares and the algorithm would check that the quantity of stock is available in the real market.
If the stock is available then you're able to trade that position and if that stock is not available then the CFD broker may requote you.
Due to the fact that sector CFDs cannot be traded, a CFD broker would actually have to go in and physically by the equivalent stock that represents your CFD sector position.
This is the reason why sector CFDs cannot be traded in the first 15 minutes of the day and the last 10 minutes of the trading day.
What should you look out for when trading sector CFDs? While sector CFDs are a great product to trade you need to understand all the ins and outs of this product.
The two biggest issues you need to consider before trading sector CFDs are the overnight financing rate, which can be as large as the RBA plus or minus 4%, and the large spread that can sometimes be found of the sector CFD.
The spread is the difference between the first buyer and the first seller and can sometimes be up to 20 points on a sector CFD.
As a result you may find this product extremely difficult to intraday trade and instead you may need to trade sector CFDs on a longer time frame.
This now means you need to take into account the overnight financing charge to see if this product is right for your personal circumstances.
