Module 1: Chapter 7
A stock market is divided into different sectors. Each sector constitutes a group of stocks that have a lot in common, mainly because they are from a similar industry. There are a total of 11 sectors in the stock market, according to the Global Industry Classification Standard (GICS). In this chapter, we will discuss these sectors in brief.
Sectors of Stock Market
Stocks are categorised into sectors in order to make them easy to compare the businesses or companies that have a similar business model. At the time of investing, you can select the stocks within these sectors that suit your goals the most. Further, sectors also make it easy to compare the available stocks in order to find the most profitable ones.
- Energy Sector
This sector includes the companies that operate in the natural gas and oil industry. It covers oil and gas production and exploration companies, as well as the producers of fuels like ethanol and coal. Further, this sector also includes the businesses that supply equipment, services, and materials to oil and gas manufacturers.
- Materials Sector
The material sector covers the companies that supply a range of goods for manufacturing and other operations. Within this sector, you can find producers of construction materials, chemicals, packaging and containers, etc.
- Industrials Sector
This sector includes a wide range of businesses and companies that involve the use of heavy machinery and equipment. You can find airlines, logistics, and airline companies in this sector along with the defence, aerospace, engineering and construction industries.
- Utilities Sector
The utility sector covers all types of utility companies. In this sector, you will find utilities like electrical power for residential and commercial purposes, natural gas distribution, water distribution, renewable electricity etc.
- Healthcare Sector
The Healthcare sector is further divided into two categories, one covers companies that develop treatments and pharmaceuticals based on biotechnology along with the supplies and tools required for the clinical trials to test those treatments. The other sub-sector includes healthcare services and equipment, for example, health insurance, surgical equipment supply, etc.
- Financials Sector
This sector encompasses companies that work towards handling money. Banks, brokerage firms, insurance companies, finance providers etc. fall into this sector.
- Consumer Discretionary Sector
This sector includes the goods and services for which customers demand according to their financial sector. For instance, if you earn $25,000 per year, then you'd buy a different car than the one who earns $25 million per year. This sector of the stock market includes all the businesses and companies that sell luxury items and leisure products. Both eCommerce companies as well as brick and mortar companies can be seen in this category.
- Consumer Staples Sector
The consumer staples sector encompasses all the goods and services needed by the customers regardless of their financial status. This includes companies operating in food, beverage, personal care, and other household items. The companies that are selling stapes are also included in this sector, for example, supermarkets.
- Information Technology Sector
The IT sector covers companies involved in technological innovation. Some companies in this sector focus on providing technological solutions and creating software, while others are involved in the manufacturing of equipment, hardware and components.
- Communication Services Sector
This sector was added recently by GICS. It includes some areas that were earlier used to be a part of other sectors. Telecommunication services, including both wireless and landline service providers, come into this sector. Further, media and entertainment companies are also included in this sector.
- Real Estate Sector
This sector covers two types of investment groups. Some stocks in this sector involve the development of new real estate projects and then managing them by having tenants for the space within the property. Apart from these, various real estate investment trusts also come under this sector.
Cyclical Vs Defensive Stocks
The biggest advantage of sector investing is that it allows you to invest in the stocks according to the economy. Note that the stocks within a market are classified as cyclical, defensive and industrial stocks. Let's see what this classification means:
Cyclical Stocks
As the name suggests, these stocks are likely to be influenced by unpredictable price fluctuations. In short, these stocks are dependent on the economy of a country. These stocks refer to the companies that experience higher profits when the economy is booming. Tata Motors is a good example of this category of stocks. For those who don't know, the company sells vehicles. So, when the economy is growing, people earn more and are more likely to purchase cars and vehicles. In this way, sales and profits of Tata Motors increase.
The drawback is, that when the economy declines, the profit and performance of these stocks also decline.
Defensive Stocks
These stocks are generally less likely to be influenced by the change in the economy. They are also known as non-cyclic stocks because their prices remain constant during all the phases of an economic cycle. Examples of these stocks include essential and non-durable items (like toothpaste, soap, detergent, etc.) that people will continue to use and buy regardless of the economic situation. Utilities such as gas, water, and electricity also come in this category.
Investing based on a sectoral approach
Sector investing is quite popular among investors. Any investor can plan to invest in the sector he/she is interested in. Also, if you like a particular sector but don't want to invest in a particular company, then you can also take part in sector investing. You can seek investments like mutual funds and ETFs that are low in risk and are tied to particular sectors.
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