The stock market is filled with investment options from a variety of companies across numerous industries. A market sector refers to a category of companies that are in direct competition with each other. They buy and sell the same goods and services.
Market sectors are important so investors and portfolio managers can break down the allocation of funds within their portfolios. Moreover, to have a well-diversified portfolio, you should consider having stocks from each market sector.
How Do Market Sectors Work?
There are a total of 11 sectors in the stock market, all with its own features and characteristics. Within each of these sectors umbrella are groupings of industries and the companies that trade on the stock market in those industries.
Market sectors are important for investors to understand how companies are divided and subdivided to create a diverse portfolio. Within the stock market, the classification system goes in descending order as follows: sectors, industry groups, industries, sub-industries.
Why Invest in Different Market Sectors?
When you are investing to build wealth, one of the strategies that you should consider is diversification. By diversifying the stocks you hold across the different market sectors, you minimize your unsystematic risk. Investing across multiple market sectors means you are investing in numerous industries, which allows higher performing stocks to compensate for lesser performing ones.
How Do Investors View Market Sectors?
Many investors who are serious about increasing their wealth look at the performance of market sectors on a weekly basis. You should consider following this lead because the stocks within each sector tend to follow the performance of their respective sector.
How Are Market Sectors Influenced?
Each market sector is influenced by different factors. While the overall market can be influenced by major events like political instability, pandemics, inflation, and war, market sectors can be influenced by other factors as well. Consumer spending, the housing market, manufacturing declines, and oil prices can all influence different market sectors.
Do Market Sectors Behave Differently on a Seasonal Basis?
Over the course of the year, certain sectors may dip or rise depending upon the current seasons. However, as an investor this information should not be used as a buying/selling strategy. Instead, knowing this will help provide insight on why your stocks are performing in a specific way during various seasons throughout the year.
If you are interested in timing when to buy specific stocks, speak to your financial advisor. They can provide you with suggestions on when to buy securities in different market sectors. Some details they might provide include information like the transportation industry stock is low during the summer, but materials stocks tend to perform better in the months of November through April.
Types of Market Sectors
According to economists, almost all economies are divided into four different sectors, meaning the businesses within them are related by products and/or service.
Firstly, the primary sector includes companies that harvest or extract natural products from earth. Found within this sector is agriculture, forestry, mining, fishing, and energy resources like wind power.
The secondary sector includes construction, manufacturing, and processing companies that make and distribute goods. Also, this includes utilities that are provided to households.
The tertiary sector is also sometimes called the service sector. Found within this sector is retail, financial services, hospitality and leisure, communications, transportation and more. It consists of companies that provide service offerings to consumers.
Lastly, the quaternary sector includes the intellectual aspects of the economy. This includes education, research and development, and other intellectual pursuits.
What Are The 11 Market Sectors?
Within the stock market there are 11 different sectors. There are well known companies within each one.
The energy sector contains companies that specialize in oil, gas, coal, energy equipment, and other types of energy service companies. The most well-known companies within this sector include Shell, Exxon, BP, Chevron, and Schlumberger. All these companies pay generous dividends and typically generate billions in profit annually.
The energy sector moves in correlation to the price of crude oil. In short, if crude oil prices fall, it is safe to bet that the companies found within this sector’s prices are falling as well.
The materials sector contains companies that provide raw materials that other companies utilize to do business. This includes forestry (wood), mining (gold, copper, and zinc), construction materials, and even packing companies that produce tape and containers. For example, some of the best-known companies within the materials sector include Dow, Sherwin-Williams, and Valvoline.
All the companies within this sector are at the beginning of the supply chain. In short, they provide the needed supplies for other businesses to operate.
Next in line is the industrials sector. Construction, manufacturing, defense, machinery, airlines, and aerospace companies all fall within this category. There are several household names that fall within the industrial sector: Boeing, UPS, Delta, 3M, Caterpillar, Deere, and more.
The companies in the industrial sector generate stable dividends and have a lot of cash flow.
The utilities sector is comprised of companies that are your gas, electric, and water utilities. These companies provide individuals and businesses with the necessary services for their homes/offices.
Because there is little to no competition in the areas where your utilities operate, local governments are responsible for regulating utility pricing.
The next sector is the consumer discretionary sector. Included within this sector are companies that provide products that are considered a “luxury” or not needed for survival. This is the sector where you spend your discretionary income. More importantly, it includes companies that provide things like cars, hotels, restaurants, apparel, media, home products, and more.
The products within this sector are dependent upon the current economic conditions and the wealth of individuals. When consumers are purchasing and spending money, the companies within the sector are profitable and making strong earnings. However, when consumers pull back spending this sector can struggle.
Unlike consumer discretionary above, the consumer staples sector is filled with food and beverage companies that consumers consider a staple in their household. Also, this sector includes personal products, household goods, supermarkets, and tobacco products. It tends to be resilient during an economic downturn because consumers still buy these products regularly as they are a “staple” in their daily lives.
For example, the most common names in this sector are Coca-Cola, Costco, Walmart, and so many more.
The healthcare sector includes healthcare services, equipment, and pharmaceuticals. Additionally, it includes scientific-based companies that try to improve the human mind and/or body.
The most common names in this industry are Johnson & Johnson, UnitedHealthcare, Pfizer, and Merck. A new and rapidly growing addition to this sector is cannabis companies. This sector tends to be a safe bet because all people need medical care.
The next sector on the list is the financials sector. Within this sector you will find all the companies that invest, finance, move, or store money – like banks, credit unions, credit card issuers, and insurance companies. Bank of America, Chase, and JPMorgan are just a few examples of companies within this sector.
The financial sector is tied closely with interest rates. If interest rates increase, these companies will make more money.
The information technology sector is also commonly called the “tech sector.” Within it are companies focused on software, internet, data processing, communication, IT services, and more. There are many common names within this sector like Microsoft, Apple, Visa, Adobe, and Square.
This sector has been one of the leaders over the last few years because of the rise of technology-based companies.
This sector consists of companies that help keep people connected. Communication services companies like AT&T, Verizon, Netflix, Facebook, and Google fall within this sector.
Most of these companies make their money on recurring revenue and advertisements, making them a stable option for investing.
Lastly, the real estate sector includes real estate companies and Real Estate Investment Trusts (REITs). It is the newest addition as a market sector and is filled with companies that operate malls, apartments, offices, and senior living communities.
The most common names in this sector are AvalonBay Communities, which operates large apartments, and Simon Property Group, which operates malls.
Why Is It Important to Diversify Your Portfolio?
You have likely heard this phrase a million times: Don’t put all your eggs in one basket. This rings true for investing. If you concentrate all your resources in one place, you might see big returns, but you run the risk that you could lose everything.
However, if you invest in only one market sector, the stocks within it all tend to move together. For example, if you only invest in energy stocks, and one is down, there is the strong likelihood that the others will be as well.
When you diversify your investments across multiple market sectors, you limit the exposure to all your investments fluctuating in the same manner.
Invest In Different Market Sectors
While past performance is not indicative of future results, investors have found that diversifying their portfolios across different market sectors minimizes their risk while providing stable returns.
In conclusion, continue to watch the market trends, then begin picking your preferred stock within each sector. If you do not have a clear picture on where to start, work with a trusted financial advisor. They are a valuable resource to help you diversify your portfolio across all the market sectors.