Different Sectors of the Market

Utilizing Sectors & Industries to Minimize Risk

When we decide to take our hard-earned money and invest it in the stock market, we accept that there is risk involved. We are not guaranteed to make a profit and could even lose all our investment. The good news is that we can limit this risk by using many of the available tools to make smart and educated investing decisions.

Sectors

One such tool is how the stock market is broken down. The Global Industry Classification Standard (GCSI) has created groups of companies that sell similar products or services. These groups are called sectors. This is very helpful in terms of investing because it allows for an easy comparison of how similar companies are doing compared to each other.

There are 11 different sectors in the US stock market. They are Energy, Materials, Industrials, Utilities, Healthcare, Financials, Consumer Discretionary, Consumer Staples, Information Technology, Communication Services, and Real Estate. These sectors are a direct mirror of the sectors that the overall economy is broken down into.

Each of these sectors have an index fund that closely mimics it. The most commonly used index funds are Vanguard and SPDR. These can be great tools for diversifying your portfolio into different sectors without researching and purchasing individual companies.  

Examples of what types of companies are in each sector can be seen below, along with the correlating Vanguard Index Fund (for other index funds, click here –  The 11 Sectors of the Stock Market:

Energy

This sector is comprised of companies involved in the oil and gas industries. It can range from the actual drilling and recovery of the resources to the production and selling. Example companies:

Offshore Oil Drill, Courtesy of Keri Jackson from Pixabay
Petroleum Refinery, Courtesy of Nicola Giordano from Pixabay

Materials

This sector is comprised of companies involved in the mining and production of raw materials that will be used for manufacturing, such as gold, silver, and lumber. Companies involved in containers and packaging are also included in this sector. Example companies:

Gold Bars, Courtesy of Steve Bidmead from Pixabay

Silver Coins, Courtesy of Matthew Heinrichs from Pixabay
Lumber, Courtesy of Eloneo from Pixabay

Industrials

This sector is comprised of companies that make finished goods that are then used in construction and manufacturing. It also includes transportation-type companies. Overall, this sector covers a very large swath of companies ranging from railroads to airlines to military manufacturers. Example companies:

Lockheed Martin F-22 Raptor, Courtesy of David Mark from Pixabay

Boeing 777, Courtesy of Pkozmin from Pixabay
Union Pacific Train, Courtesy of Rja1988 from Pixabay

Utilities

This sector is comprised of companies involved with the production of utilities, such as electricity, gas, water, and the companies that provide said utilities from the producer to the consumer. Example companies:

Power Lines, Courtesy of Michael Schwarzenberger from Pixabay

Underground Utilities, Courtesy of Monika P from Pixabay

Healthcare

This sector is comprised of companies involved in the medical field in all kinds of forms, such as developing and producing medical supplies, equipment, software used for medical reasons, and companies that develop pharmaceuticals and treatments. Example companies:

Hospital, Courtesy of Alfred Derks from Pixabay
Pharmaceuticals, Courtesy of Steve Buissinne from Pixabay

Financials

This sector is comprised of companies that deal with finances, such as banks, investment firms, or insurance companies. Mortgage REITS are also classified under the financial sector. See real estate for more info about REIT’s. Example companies:

JP Morgan Chase Courtesy of Ben Sutherland
Fidelity Investments Courtesy of Adam Fagan

Consumer Discretionary

This sector is typically made up of companies involved in selling goods to consumers, such as retail stores, or consumer service providers, such as media companies. This sector does better during booming economic times and worse during recessions or depressions because these are usually the wants and not the needs of consumers. Example companies:

Shopping Mall, Courtesy of Michal Jarmoluk from Pixabay
McDonald’s Restaurant, Courtesy of Mike Mozart

Consumer Staples

This sector is comprised of companies that produce staples or goods that consumers need and are unlikely to cut from their budget during economic hard times. Think of food or beverage producers, personal care items, and tobacco. Example companies: 

Grocery Store Perishables, Courtesy of Squirrel Photos from PIxabay
Personal Care Items, Courtesy of Pxfuel

Information Technology

This sector is comprised of companies involved in technology. This could be the manufacturing of electronics, developing software, or providing technology services. Example companies:

Computer Microchips, Courtesy of Arek Socha from Pixabay
Apple Products, Courtesy of Tran Mau Tri Tam from Pixabay

Communication Services (Also Referred to as Telecom)

This sector is comprised of companies that provide telecommunication services, such as cable companies, phone providers, internet providers, and also media and entertainment companies. Example companies: 

Communication Towers, Courtesy of Fabrico from Pixabay
Google, Courtesy of Photo Mix from Pixabay

Real Estate

This sector is comprised of companies or real estate investment trusts (REITs) involved in retail, industrial, commercial or residential real estate (mortgage REITs fall under the Financial Sector). This could be in the form of developing new land or managing rental property.

REITs have special tax advantages because they disperse the company’s profits as dividends to the shareholders instead of using a direct paycheck. Purchasing REITs is a great way to get involved in real estate investing if you do not have the capital to purchase land or a house. Example companies: 

Single Family Home Property, Courtesy of Paul Brennan from Pixabay

Multi-Family Home Property, Courtesy of F. Muhammad from Pixabay

Industries

While breaking down the stock market into sectors is a useful tool for investing, some sectors are so large that companies within it will only be slightly similar. Because of this, sectors are further broken down into groups called industries. The number of industries per sector can range from 2 to 11, depending on how large the sector is.

Industries allow you to compare closely related companies and determine if one is doing better or worse than the others. The different sectors and their respective industries are listed below.

Energy

  • Energy Equipment & Services Industry
  • Oil, Gas & Consumable Fuels Industry

Materials

  • Chemicals Industry
  • Construction Materials Industry
  • Containers & Packaging Industry
  • Metals & Mining Industry
  • Paper & Forest Products Industry

Industrials

  • Aerospace & Defense Industry
  • Air Freight & Logistics Industry
  • Airlines Industry
  • Building Products Industry
  • Commercial Services & Supplies Industry
  • Construction & Engineering Industry
  • Electrical Equipment Industry
  • Industrial Conglomerates Industry
  • Machinery Industry
  • Marine Industry
  • Professional Services Industry
  • Road & Rail Industry
  • Trading Companies & Distributors Industry
  • Transportation Infrastructure Industry

Utilities

  • Electric Utilities Industry
  • Gas Utilities Industry
  • Independent Power and Renewable Electricity Producers Industry
  • Multi-Utilities Industry
  • Water Utilities Industry

Healthcare

  • Biotechnology Industry
  • Health Care Equipment & Supplies Industry
  • Health Care Providers & Services Industry
  • Health Care Technology Industry
  • Life Sciences Tools & Services Industry
  • Pharmaceuticals Industry

Financials

  • Banking Industry
  • Capital Markets Industry
  • Consumer Finance Industry
  • Diversified Financial Services Industry
  • Insurance Industry
  • Mortgage Real Estate Investment Trusts (REITs) Industry
  • Thrifts & Mortgage Finance Industry

Consumer Discretionary

  • Automobile Components Industry
  • Automobiles Industry
  • Distributors Industry
  • Diversified Consumer Services Industry
  • Hotels, Restaurants & Leisure Industry
  • Household Durables Industry
  • Leisure Products Industry
  • Multiline Retail Industry
  • Specialty Retail Industry
  • Textile, Apparel & Luxury Goods Industry
  • Internet & Direct Marketing

Consumer Staples

  • Beverages Industry
  • Food & Staples Retailing Industry
  • Food Products Industry
  • Household Products Industry
  • Personal Products Industry
  • Tobacco Industry

Information Technology

  • Communications Equipment Industry
  • Electronic Equipment, Instruments & Components Industry
  • IT Services Industry
  • Semiconductors & Semiconductor Equipment Industry
  • Software Industry
  • Technology Hardware, Storage & Peripherals Industry

Communication Services (or Telecom)

  • Diversified Telecommunication Services
  • Wireless Telecommunication Services
  • Entertainment
  • Media
  • Interactive Media & Services

Real Estate

  • Equity Real Estate Investment Trusts
  • Real Estate Management & Development

Example

Here is an example of how to incorporate sectors and industries in your investment strategy.

Company X’s share price is up 5% from last year. Looking at it through a narrow telescope, you might come to this conclusion: “Oh, this is a great buy. It has been going up!” But upon further research, you learn the sector as a whole is up 7%, but the specific industry it is in is up over 12%.

With this information, we now know that Company X is actually NOT performing as well as its peers or similar companies. We could either perform a thorough investigation to determine why it is performing worse than its peers and if it could still be a good investment, or we could move on and start looking into other companies.

This is one example of an unlimited number of ways to incorporate sectors and industries into your investment decision-making and strategy.

Conclusion

Important Takeaway

Our modern-day stock markets are enormous, having thousands of companies and handling hundreds of millions of transactions each day. To help investors compare companies against one another, the stock market (and economy) has been broken down into subcategories called sectors which are further broken down into industries.

These breakdowns allow investors to easily see how specific areas of the stock market are performing. It also groups similar companies together and makes it much easier to compare companies against one and another and to determine which could be a better investment.

Video Learning

The YouTube channel Trading 212 has a great video explaining some of the previously mentioned concepts. Click on the video below to watch it. We do not take any credit for their work or claim the video to be ours. Please like, follow, and share their video to support their channel!

Extra Resources

Don’t forget to check out the Materials Tab for helpful extra resources and definitions of Key Terms!

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Extra Resources:

Key Terms (Courtesy of Investopedia):

  1. GCSI – “The S&P GSCI is a composite index of commodities that measures the performance of the commodity market. The S&P GSCI is the commodity equivalent of stock indexes, such as the S&P 500 and the Dow Jones. The S&P GSCI was simply called the Goldman Sachs Commodity Index (GSCI) before it was purchased by Standard & Poor’s in 2007. Investing in a GSCI fund provides a broadly diversified, unleveraged, long-only position in commodity futures.”
  2. Industries– “Industry refers to a specific group of companies that operate in a similar business sphere. Essentially, industries are created by breaking down sectors into more defined groupings. Therefore, these companies are divided into more specific groups than sectors. Each of the dozen or so sectors will have a varying number of industries, but it can be in the hundreds.”
  3. REIT – “A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.”
  4. Sectors– “A sector is an area of the economy in which businesses share the same or a related product or service. It can also be thought of as an industry or market that shares common operating characteristics. Dividing an economy into different sectors allows for more in-depth analysis of the economy as a whole.”
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