Purpose and characteristics of the stock market sector
The stock market sector shows the grouping of stocks. Companies working in the same or at least similar industries belong to a given group.
Of these, 10 are most often used, which we will now take in order. Of course, the company you choose may be outside the sector, or if it is working in a border area, it may fit into more than one sector.
The purpose of creating the stock market sector
Comparability
Measuring different profitability or efficiency indicators, or the riskiness of a particular investment, can typically be used in all cases, but you will get a distorted picture if you compare, say, a manufacturing company (which has a high demand for an invested asset) to, say, a service company.
We divide companies into sectors, making it easier to compare companies operating according to a similar business model, so you can choose the most profitable one for you.
Making easier to choose
The stock market sector, as it basically also covers a business model, shows how a given company is expected to react to a particular market event.
This event can occur in several ways.
Obviously, the health sector responds to a quarantine differently than the car industry. But if it’s already car manufacturing, an automotive development or just regulation will also affect the service sectors, but it won’t affect companies that the industry says it really has nothing to do with.
If you anticipate the occurrence of a particular event, you can decide if that particular stock market sector is right for you or choose another.
When is knowing of the stock market sector important?
I could say that always, but that would be a bit of a short answer.
When selecting individual shares
Knowledge of the stock market sector is essential when choosing the right individual stock for you. Because each sector behaves a little differently, for certain events, its recommended time frame is different, without it you can’t make a good decision. In the case of individual stocks, the return option is also important if you prefer to profit from a price increase or dividend. If you know the sector, you only need to choose the right type of stock for you.
Equity fund
An equity fund contains individual shares in the same way as you would choose yourself. The difference is that here you are either selected according to a pre-established logic (e.g. ETF) or a team of professionals puts the package together for you.
Regardless, it’s not a downside to having an understanding of what they’re saying. There are also thousands of mutual funds, even if you narrow it down to the roughly 50-100 available to you, you still need to know what risk you are taking by choosing that particular area.
Use of the stock market sector in compiling the investment portfolio
Perhaps this is where you get the most benefit, after all, putting together your investment portfolio is about you, your life. You need to know when you need how much money and what tools you should use to get there and then.
Breakdown of the stock market sector
There are basically 10 groups, these are:
- Healthcare
- Energy sector
- Consumer goods sector
- IT
- Real estate sector
- Industrial sector
- Communication
- Utility sector
- Raw materials sector
- Financial sector
Each contains shares in the same way, so it covers the same rights. Regardless, they will react differently to an event and ideally play a different role in your investment portfolio.
Healthcare
It has two main branches
- companies developing drugs and treatments, they also clinically test their developments
- healthcare provider and equipment manufacturer, e.g. medical diagnostic tool, surgical supplies, health insurance
This is the sector that everyone either needs or will need.
The healthcare sector includes different types of equities. From having two main branches, healthcare is so extensive that it can be further broken down.
- pharmaceutical shares: these are shares of pharmaceutical manufacturers using traditional chemicals or biologically (using bacteria, enzymes).
- shares of medical device manufacturers: devices used in patient care from gloves to robotic surgery systems
- health payers: whether they are paid privately or as an employer benefit, it is their job to pay for health care costs.
- health care provider: they provide health care services to patients, their task is the actual healing activity.
Risk in the healthcare stock market sector
Like all investments, this sector has risks. These may be general risks (such as those that lead to greater success for competitors), but may be tailored to that given sector.
As healthcare is a highly regulated sector, regulation or its modification has an impact on a company’s profitability. You just have to think that until they get a license, even if they have a product, they can’t market it.
Despite the risks, the outlook is very good in the long run. An aging population around the world is helping this, so if you’re a patient investor, you’ll have great opportunities.
Energy sector
It is an important but risky sector.
This includes energy companies. As:
- Gas
- Oil
- Coal
- There are also companies that produce the processed form, ie those involved in fuel production.
- This includes the service sectors, which provide equipment for this as well as energy-related services.
Renewable energy as an energy sector
The assessment of renewable energy on this issue is already quite mixed. As long as solar cell companies and companies dealing with solar energy as a form of renewable energy are increasingly included here, many of their competitors are more close to the utilities sector.
Is it a good idea to invest in the energy sector?
Energy prices are changing relatively rapidly, which affects the operation of these companies as well as the world economy.
Stoppage due to covid showed the effect best. Quarantine has led to a halt in transport (mostly air transport), which has also led to a significant drop in demand for oil. As a result, several oil companies got into serious trouble, not one of them filed for bankruptcy.
If you want to invest in this sector, be sure to keep diversification in mind. No matter how well a company performs, don’t put too much emphasis on it.
What to definitely review:
- conservative money management: because the operating environment can change quickly, they cannot manage their finances aggressively. This applies to dividend payments, borrowing and anything else that affects their liquidity
- low production costs: this is definitely included in the price of the product, and if demand decreases, what is offered at a higher price is removed from the list first. If they are less exposed to changes in price levels, they can operate more stably
- credit rating: choose as stable as possible
Consumer goods
Here we have to distinguish between basic consumer goods and they can be said to be almost luxury goods.
Basic consumer goods
In the basic consumer goods sector, you can find the ones that people need every day, regardless of their income status. E.g
- the food industry,
- the tobacco industry,
- manufacture of soft drinks
- manufacturers of household and personal care products
- distribution and distribution networks (eg supermarkets)
Although innovation as a concept is a bit far from the sector, its products and services are evergreen. Demand for these products is typically stable, with a large market share. Because the companies already here are already large (otherwise they would not have a large market share), they can be even more attractive to investors through dividend yields.
Luxury consumer goods
At the other end of the scale are the elevated equivalents of almost the same products. After all, if you’re rich, you’re probably expecting (and paying for) a different quality, whether in food, clothing, or even a car, than if you didn’t have a singly penny.
These are companies that consumers don’t spend on because they have to, but because consumers can afford it. Accordingly, demand for the products of these firms is cyclical, so the price of their securities also follows this.
IT
This part of the stock market sectors encompasses firms that are involved in either software or technology implementation. This includes the manufacture of semiconductors and chips. In short: anything that is a widget or that operates the widget.
Based on this, the 2 most obvious examples are Apple and Microsoft.
If you look at this sector for yourself, you don’t have an easy thing to do in the analysis, you can easily reach a risk that you didn’t originally want to take.
Since many companies are not profitable, you don’t see much use in calculating the P / E ratio. In most cases, you can use the revenue increase the most, after all, there is no profit because it will turn everything back. Over time, however, the company needs to become more and more efficient, especially in terms of sales.
Real estate sector
As the name suggests, it includes several branches:
- development and implementation of new real estate projects
- real estate management
- acquisition of tenants
- other groups of companies also operating in the field of real estate
These can be large office buildings, but even real estate agents.
If you also choose the sector, you should also expect cyclicality. Real estate is a capital-intensive area, so it is postponed by both individuals and companies in an unstable economic situation.
The same is true for rental companies: if the economy booms, more companies are expected to rent either an office or a warehouse, even if they are present online anyway. However, as the economy slows, it becomes less important.
Industrial sector
It covers a wide range, with the common feature that heavy machinery is usually required to operate.
Examples of such businesses are:
- building industry
- mechanical engineering
- automotive industry
- airlines, railways
- waste processing
- transporting
- companies that manufacture the equipment and machinery they need are also located in this sector.
The industrial sector is cyclical and very exposed to the current state of the economy. Economic downturns or stagnations can also easily dampen demand for their products, and with it their exchange rates.
Therefore, consider carefully before making a selection
- the credit rating of the given company,
- operating costs,
- their existing loan portfolio.
The latter is also important in view of the fact that these companies typically operate with a high capital requirement, so the capital raised as a loan for them will also be large. And this will definitely have a cost of capital.
Fortunately, the sector is just big enough to give you the opportunity to diversify.
Communication
Some of these companies were previously classified in other sectors as there is some overlap. In this sector you will find eg:
- telecommunications service providers
- mobile communications providers
- media and entertainment companies (eg television, radio, or their Internet equivalents)
An example of this is Facebook
If you also choose this stock market sector, don’t just choose an “arbitrary other” company from the sector for comparison, as this is a very broad area. Instead, compare the selected company to one in exactly the same industry and, if possible, in the same stage of growth.
When choosing, the consideration is whether you prefer a dividend or an exchange rate gain. Telecommunications companies are more likely to pay dividends, although their exchange rates are growing more slowly, and information technology companies are typically growing faster.
Of course, in addition to these, also examine the stability of their operation. Being that it ensures their long-term survival and development.
Utility sector
The most well-known area, after all, is probably yourself using their services every day. That is, water, sewage, gas and electricity suppliers, suppliers, distributors for residential and corporate customers.
If you invest in this sector, the value of their shares is also very stable due to the very stable demand. Don’t get me wrong, these companies are not dead fish, but the exchange rate is less volatile.
Due to the stable inflow or the government-guaranteed income, they have the opportunity to pay even above-average dividends. Before you run and buy the papers of the utility company at your fingertips, review their performance. Although the risk is lower than for a couple of companies with similar plant sizes, careful selection is essential here as well.
Raw materials sector
This includes companies that supply other companies with the raw materials or packaging needed to manufacture them. Accordingly, the following manufacturers are here:
- chemicals
- building materials
- tanks
- packaging material
- mining products (metals and minerals)
- paper products
This stock market sector is important to investors because it either facilitates or enables the production of products needed for everyday life. This, in turn, does not mean that you invest once and you are guaranteed to get rich. Manufacturing companies are significantly affected by the current state of the economy, so the demand for raw materials is also cyclical. If the economy weakens, fewer products are needed, and obviously the demand for raw materials, as well as goods, will fall. Maybe you could guess if the price of the product decreases, the profitability of the raw material companies decreases, and thus the exchange rate.
A company operating in a well-functioning commodity sector has multiple sectors, thus reducing its own risk. Regardless of the sector, a booming economy is good news for them too, but depending on the capital requirements of their own operations, a booming economy may mean limited profitability for them, depending on the number of competitors.
Financial stock market sector
Most people here only think of banks, but here you will find all the money management companies. As:
- banks
- insurers
- brokerage firms
- financial service providers
- financial technology companies (eg PayPal, Visa)
- cryptocurrency companies (yes, eg Bitcoin)
- mortgage companies (eg real estate investors)
If you want to invest in this sector, know that it is a relatively well-regulated sector that is in significant demand. But it’s not risk-free yet, so chew through all your performance metrics (but even the rest) diligently. The banking sector is vulnerable and cyclical. If unemployment rises, the proportion of unpaid or already canceled loans will increase, which will also worsen the bank’s ability.
As no crisis lasts forever, equities in the financial area are more suitable for long-term (over 5 years) investments.
When to choose which sector?
Demand for products and services in several industries is relatively constant both in good times and during bad times. This makes them quite recession resistant. These industries are:
- health care
- consumer goods (distributors of basic goods)
- utility companies
- although not exactly because of its product, it is recession-resistant for all cost-conscious businesses.
Based on this, you can use cyclical areas in the long run, and you can use less volatile and more stable areas (since you can make a nice profit compared to other forms here as well) for further diversification.
Questions:
- Which area do you know or have used before?
- What do you think it takes to safely enter to a given area?
- For less cyclical stocks, what recommended holding time do you consider realistic?
If you would like to make the right decision, please contact us to arrange an appointment for this.