Stock sectors categorize the companies listed on the stock market into groups according to the type of business in which they are involved. Investors can study the performance of an entire sector in order to pinpoint which sectors offer the best opportunities for investing, before narrowing their focus to selecting individual companies within a promising sector.
The Significance of Stock Sectors to Investors
Some investors tend to invest solely, or primarily, within a certain sector or sectors, because those sectors generally fit their requirements of lesser or greater volatility, stability, or growth potential. There are investors who share the belief held by Warren Buffett; that it is only wise to invest in companies which the investor understands, and according to this premise focus exclusively on particular sectors, or avoid others.
There are also investments available in specific sectors, which allow an investor to take advantage of the performance of a sector as a whole, rather than individual companies. These investments are known as Sector Funds, or Specialty Funds, and are offered as mutual funds, as well as exchange traded funds (ETFs).
Awareness of market sectors can allow for implementation of strategies such as sector rotation - a technique involving the movement of funds between areas of the economy aiming to profit from specific economic sectors as their performance rises and falls.
What Are the Primary Stock Sectors?
The primary market sectors include broad categories encompassing the following areas;
- Basic Materials
This sector consists of companies engaged in the industries of metal and mining, energy, and chemicals. Basic materials are also classed as commodities, and as such, the companies involved are affected largely by factors such as production costs, and supply and demand. The basic materials sector is highly cyclical, and investing successfully in this area requires keen economic awareness.
- Communication Services
Until recent times, this was one of the sectors which was considered a stable and growth oriented sector, and primarily comprised telecommunication companies. However, since the advent, and increasing popularity of pay TV providers, and the wide range of options including broad-band Internet and wireless Internet packaged with TV and fixed line telephone services, the competition has become fierce, and the sector more volatile.
- Consumer Goods
This sector includes companies focused on providing merchandise to consumers, which ranges from basic necessities such as food and household products to entertainment and luxury items. Some experts divide this sector into two areas, and in doing so, define an area which is stable and offers consistent returns as consumer necessities, and another area which is affected much more by economic factors as consumer luxuries and will be a primary area to suffer losses with economic downturn.
- Financial Services
This sector encompasses banks, brokerages, exchanges and insurance companies. It is one of the stock sectors which tends to mirror the general economic outlook, and usually thrives when conditions are good and suffers losses when downturns are experienced.
This stock sector comprises pharmaceutical companies and healthcare service organizations, as well as bio-tech companies and medical device providers. This sector is less affected by economic conditions, and more affected by the quality of developments and the level of competition. It is an area that may offer better than average investment opportunities.
The industrials stock sector encompasses industrial manufacturing, aerospace and defense, construction and waste management. Due to the broad spectrum of fields included in this sector, the market conditions for this sector are also very diverse. When investing in this sector, it is necessary to be aware of the conditions affecting the specific industry.
- Real Estate
The real estate sector includes companies involved in the development, management and buying and selling of commercial or residential real estate. The performance of this market sector is closely tied to economic conditions, and particularly interest rates.
The technology sector is made up of companies focused on the development, production and distribution of technological products and services. The speed of development within the sector and the level of competition make it a fast-paced and volatile sector.
To be well versed in the various stock sectors, their unique properties, and how to evaluate their performance is of great benefit to an investor. This understanding allows the investor to make informed trading choices, whether these choices are to invest within a range of sectors, specific sectors, or to apply strategies such as sector rotation.