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