When analyzing stocks it’s easy to fall into the habit of thinking of one stock at a time or of the stock market as a whole. We track a specific stock or we check the newspapers to see if the stock market rose or fell. But there’s an in-between. With thousands of companies making up the stock market, there are a lot of different ways to categorize them. One of the most common is by sector.
Looking at different economic sectors individually makes it easier to understand how different economic phenomena affect the stock market. Looking at the sector breakdown of a portfolio is also another important way to ensure diversity.
Let’s take a look at some of the market’s most significant sectors to get a deeper understanding of how they influence the big picture:
Healthcare
This includes pharmaceutical companies, hospital management firms, and biotech companies. This is a relatively stable sector since people will always need healthcare. However, it can be affected by changes in technology and public policy and individual stocks can still be very volatile.
Basic Materials
This sector includes companies that produce the raw materials used in manufacturing or construction, like metals and wood. It’s very susceptible to fluctuations in other industries. For example, if the housing market drops, this sector probably will too.
Financial
This includes banks, investment brokers, and insurance companies. While all sectors can be affected by interest rates and monetary policy, this sector is the most sensitive since a lot of their money is made from interest on loans.
Technology
The category includes everything from software and information technology firms to electronics manufacturers. It tends to move with overall economic trends but has been doing well in recent years as the high-tech industry has grown.
Industrials
This is a broad sector and, since there’s no official list of sectors, many analysts divide into a number of other categories. It includes aerospace, manufacturing, and even defense. Because it actually includes a range of industries, it is affected by a lot of different factors.
Utilities
This includes gas, water, and electric companies but is separate from energy. The utilities sector is known as a defensive sector because it can help keep your portfolio stable. Even when the economy is on a downward swing, people need light, heat, and drinking water and having more money in their bank accounts doesn’t usually mean they use more. That means that utility stocks don’t often experience dramatic shifts.
Energy
This sector includes oil and gas companies and refineries. The prices of commodities like oil and gas change regularly which affect the profits of these companies and, in turn, their stock prices.
Consumer Staples
Like utilities, this is a defensive sector. It is mostly made up of food and beverage companies along with other companies that make things people won’t stop buying when budgets get tight.
Consumer Discretionary
These are companies that are very affected by economic downturns. That includes media companies, clothing, and a wide range of consumer goods and services. When people have less money to spend, these are the first products they stop purchasing so the stocks tend to be volatile.
These are just a sample. Keep in mind that different analysts and financial news outlets will have different lists. Some will divide goods and services, others separate telecom from other technology companies, and many include real estate as its own category.
The important thing is to figure out how to use these categories in your own investing. As a rule, diversity is critical. Don’t limit yourself to any one sector. Instead, use these sectors as a way to think about the movements in the market and the composition of your portfolio.
