Let’s say that you read and understood the stock indicators from the previous chapter. Now you plan to invest in the stock market and call your friend you have been dealing with the stock market for a long time. You express your interest to him, and at the outset of the conversation, he asks you- in which sector do you want to invest? Now, you’re confused. You want to invest in stocks; you know what market indicators are.
But what are sectors? You ask your friend, and he goes on by giving you an example of cuisine. He says “ assume that one fine day you order north Indian food from your favourite restaurant. You include all the typical cuisines of north India in your order. Now, consider all the food which is considered north Indian stocks and north Indian cuisine is a sector. So all the different regions are the sectors and cuisines under them are stock. Why? Because the cuisines of a region are quite similar to each other. Similarly, in a stock market, a sector is a group of those stocks which have a lot in common with each other. This is because they are from similar industries.” Now even before understanding where and how you should invest, you need to understand the stock sectors.
Let’s help you further understand the stock sectors. As per the Global Industry Classification Standard (GICS), there are 11 different stock market sectors which are commonly classified. To make a comparison between the companies easy, we categorise them based on similarity in their business model. You can choose and invest in stocks within the sector that are promising. You will be able to compare and understand which stocks are making the most money based on stock sectors. This will improve your investment decisions. Read on to understand the significant 11 sectors.
1. Energy Stock Sector
The companies that do business in the oil and natural gas industry are covered in the energy sector. The oil and gas exploration and production companies and those producing consumable fuels- coal and ethanol are included in this sector. The businesses which deal in the equipment, material, and services related to oil and gas production are also included in the energy sector. However, many renewable energy companies are not considered in the energy stock sector; instead, they are considered utilities.
2. Basic Materials Stock Sector
The companies which provide various goods which are used in manufacturing and other applications come under the material sector. The companies producing chemicals, construction material, packaging and containers within the material sector, along with the companies in mining stocks and paper making come in the basic materials stock sector. The companies which are operational in business-to-business space, therefore those selling their products to other companies and are at the beginning of the supply chain are considered in this sector.
3. Industrials Sector
Next in the queue is the Industrial sector. The business that involves the use of heavy equipment like defence machinery, aeroscape, airlines, manufacturing and construction are in the Industrial sector. The way oil companies generate lots of cash flow and have stable dividends, and the industrials also have a similar reputation. With the increase in defence budgets of many countries around the world, more cash will likely be flowing into the defence companies in this sector.
4. Consumer Discretionary
Up next in the list is consumer discretionary where you and we spent a lot of our money are the companies which come under consumer discretionary. This is the sector where discretionary income goes. The retailers, barrels, restaurants, autos, hotels, media, and household products all come under the consumer discretionary sector. All know the companies in these sectors of us. You deal with them daily. These are – Amazon Flipkart, Starbucks, Taco Bell, PVR Plaza etcetera. The companies where we shop and travel come under the consumer discretionary sector. When people are spending money like there’s no tomorrow on consumer goods, these companies are making a lot of money, and they are likely to have strong quarterly earnings.
5. Consumer Staples stock sector
Discretionary products there are also consumer staples. The food, beverages, and tobacco companies come under dissect. Also, the manufacture of household goods, personal products, and supermarkets make a part of the sector. The sector is defensive because these companies Recover quickly in the event of an economic downturn. What drives consumer tables different from consumer discretionary is that the staples are the companies which produce products data consumed are used daily bias. You may not need to buy new car clothes order at a restaurant, but you need household goods from the supermarket to survive.
6. Healthcare Sector
The stock sector comprises two primary components. The first component includes those companies which develop pharmaceuticals and treatments based on biotechnology and analytical tools and also the supplies which are needed for clinical trials. The other part includes healthcare equipment and services, medical diagnostic tools, surgical supplies and typical health insurance. Since people will always need medical care, whether it is from pharmaceutical drugs or hospital visits, companies in this sector often play well and are a safe bet.
7. Financials Sector
The business primarily related to handing money comes under the financial sectors. Within this sector, banks are a key industry group; you will also find insurance and real estate companies in the sector. The interest rate in the sector is closely tied. The big banks make a lot of money when the interest rate increases. Since banks give out loans and mortgages, the higher rate of interest goes to the bank. Some of the well-known players in the sector are
8. Information Technology Stock Sector
This is the tech sector. All the companies in this sector are Internet software and semiconductor companies. The companies which deal with technological innovation and focus on creating software or providing services related to technical solutions and implementing them come under this sector. Also, the companies that make tech possible like building equipment, components and hardware are included in the information technology sector.
9. Communication Stock Sector
The newest sector of GICS is the communication sector. This sector includes a couple of significant areas which were earlier the part of other sectors. The communication service providers, both the wireless and telecom network providers of old-fashioned landline services come under the sector. The media and entertainment companies like television and radio and also the interactive media and newer form of communications are also included in this sector.
10. Utilities Sector
The companies which electric come gas command water utilities come under this sector. They have nearly no competition in the area they operate in. The local government regulates these companies and their prices. The utility stocks sector is considered a defensive sector. People will always need the utilities, And due to this reason, the sector makes a safe bet in an unstable market environment.
11. Real Estate stock sector
The companies which operate malls, offices, and living communities come under this Real estate stock sector. The companies under this sector earn their revenue from the income made by rent and increasing property value. The real estate companies pay at least 90% of their taxable profit to shareholders as a dividend. These are good for a long-term hold since the dividend comes every three months.
So, now you are aware of the significant 11 sectors of the stock market. All these sectors have various companies under their umbrella. You can look at each sector’s performance before investing to make a better decision.
A quick recap
- As per the Global Industry Classification Standard (GICS), there are 11 different stock market sectors which are commonly classified.
- To compare the share of different companies with each other, we categorise the companies based on similarity in their business model under various sectors.
- The major 11sectors are energy stock sector, basic materials stock sector, industrials stock sector, consumer discretionary stock sector, consumer staples stock sector, healthcare stock sector, financial stock sector, information technology stock sector, communications stock sector, utilities stock sector, real estate stock sector.