A stock market sector is a set of businesses that buys and sells similar goods and services by staying in direct competition with each other. Analysts divide the stock market itself into market sectors so that shares of companies in direct competition list alongside one another. Additionally, the stock market is often divided into 11 major sectors representing the key areas of the economy. These sectors are grouped using the most commonly used classification system, the Global Industry Classification Standard (GICS).
There are plenty of different publicly traded companies that share the same broad principle. Moreover, the stocks are categorised into sectors to make it easy to compare companies that have the same business models. While investing, you can choose from stocks within the sectors that attract you the most. To top it all, investors or traders interested in gaining exposure to a particular area of the economy, or implementing a sector-rotation strategy to position their portfolio, may want to consider exchange-traded funds (ETFs) in their preferred sectors.
Let’s dig a deep look into various sectors of stock marketing that are used in economics and finance to define a part of the economy.
Take a glimpse at the several sectors –
- Consumer Discretionary
- Consumer Staples
- Telecom / Communication Services
- Real Estate
This sector provides financial services to commercial and retail customers, indicating that businesses primarily related to handling money are linked with it. Banks are a key industry within the financial sector. Still, you will also find other similar organisations grouped under it, such as insurance companies, consumer finance providers, brokerage houses, and mortgage-related real estate investment trusts.
Typically, most of the revenue generated by this sector comes from mortgages and loans that gain value as the interest rates drop. If you take a look profoundly into the economy, you will come to know that the health of the economy depends largely on its financial sectors. The stronger it is, the better the economy is, and the weaker it is, the worse the economic growth in an area.
The brokers, financial institutions, and money markets togetherly offer their services, like providing loans for businesses to expand, granting mortgages to homeowners, issuing insurance policies to protect people, companies, and their other assets. Moreover, this sector employs millions of people and helps several persons to build up savings for their retirement life.
The energy sector mostly covers those companies that are in the business of oil and natural gas. It is not only limited to the oil and gas exploration and production companies but also to the producers of other consumable fuels like coal and ethanol.
Generally, the energy sector is a large and all-encompassing term that expresses a complex and interconnected network of companies involved in the production and distribution of energy needed to power the economy and facilitate the means of production and transportation.
All in all, the energy sector also contains those firms that offer materials, equipment, and services to oil and natural gas producers. But strangely, the renewable energy industries are categorised under the “Utilities Sector”. Last but not least, these companies generate revenue from the price of crude oil, natural gas, and other commodities.
The utilities sector encompasses just about every different type of utility company one can think of. It is specialised in providing electrical power available to residential and commercial customers. This sector also further helps in natural gas transmission and distribution. The other most crucial utilities are the water industries, except for electricity and gas.
Some companies engage themselves in providing more than one service to the customers under the utilities sector. The companies that produce electricity from renewable energy sources such as hydropower, geothermal power, wind energy, solar energy, etc., are listed under the utilities sector.
The companies or organisations under this category earn a consistent income by charging consumers and businesses that use their services. Nevertheless, utilities help make our everyday life comfortable, from lighting our houses to clean water. As we need basic facilities like water, electricity, and gas to run our daily lives, this sector performs well even in economic downturns. The primary difference between the energy and utility sectors is that the energy sector provides resources to utility companies, and the utility sector provides services to customers.
The materials sector is a category made up of businesses engaged in discovering, developing, and processing raw materials. In addition, it includes a wide range of commodity-related manufacturing industries, such as makers of chemicals, construction materials, glass, paper, forest products and related packaging products. Besides, the mining and metal refining companies, including the producers of steel, also come under this category.
As the industries that come under this section are at the beginning of the supply chain, they are sensitive to changes in the business cycle. For the most part, the raw materials are naturally occurring resources, and some are considered finite. Overall, it takes millions of years for them to develop, which is outside the long-range plans of any company. At the same time, other materials are reusable but are unavailable in infinite quantities at any time.
The industrials sector includes plenty of different businesses that commonly involve the use of heavy equipment. Companies from aerospace, defence, industrial machinery, tools, construction, waste management, manufactured housing, cement and metal fabrication come under this section. The performance of this sector depends on the supply and demand for the goods needed to construct the residential, commercial, and industrial real estate segments, as well as the requirement for the manufactured products.
When the economy goes through a recession, on an average basis, the stock prices decrease due to the postponement of further expansion of companies and their activities. Regardless, there are a variety of sub sectors under the industrials sector in which some perform well and some function poorly. Therefore, you can invest in those sub sectors that are performing better.
Aerospace and homebuilding are most prevalent from many sub sectors that go through bullish growth cycles lasting for years, even in the economic downturn. On the other hand, industrial conglomerates and waste management show slow revenue generation.
Consumer Discretionary Sector
The consumer discretionary sector includes retailers (distributors, internet and direct marketing retail, multiline retail and speciality retail), media companies, consumer service providers (hotels, restaurants, and other various consumer services), apparel companies and consumer durables (household durables, leisure products, textiles, apparel and luxury goods). If I put it simply, these companies get their benefits whenever a consumer spends something out of their pocket.
Based upon the financial status of an individual customer, the demand for the goods and services depend on these companies. Suppose you have an income level of 40000 INR per month; obviously, you will not spend like a person who earns 4 lakh INR per month. This sector contains companies that sell higher-priced commodities like automobiles and other luxury goods. Apart from that, both “brick and mortar” and e-commerce based retail companies are listed in this category.
Consumer Staples Sector
The term consumer staples refer to a set of essential products used by consumers. This category includes things like foods and beverages, household goods, hygiene products, as well as alcohol and tobacco. Regardless of the financial condition of consumers, they are unwilling to cut these goods and services out of their budgets. Plus, the retail companies that specialise in selling the staples, such as supermarkets, are grouped under this category.
Consumer staples are treated to be non-cyclical, meaning that they are always in demand throughout the year, no matter whether the economy is performing well or not. Simultaneously, consumer staples are firm (unchanged) to business cycles. Furthermore, people tend to demand consumer staples at a relatively constant level, whatever their price is. These reasons are enough to create interest for the investors to invest in this sector even in the economic slowdown.
The healthcare sector has two primary subgroups. One subgroup consists of companies that develop pharmaceuticals and treatments based on biotechnology, as well as the analytical tools and supplies needed for the clinical trials that assist in testing those treatments. The other incorporates healthcare equipment and services, including surgical supplies, medical diagnostic tools, and health insurance.
Usually, the healthcare sector is considered to be both a growth opportunity and defensive play, as people will always require medical assistance. Anyway, it has become one of the largest sectors in India in terms of revenue and employment. Furthermore, you will find plenty of both public and private healthcare systems.
The technology sector is the category of stocks relating to the research, development, or distribution of technologically based goods and services. It consists of those businesses that manufacture electronics equipment, software, computers, or other products and services related to information technology. Information technology also includes makers of semiconductors that are further used to make semiconductor chips.
The technology sector offers a variety of products and services for both customers and other businesses. Goods like computers, mobiles, home appliances, TV, and so on are continually being improved and sold to several customers with new built-in features. On the other side, companies depend on inventions coming out of the technology sector to design their software, handle their logistics systems, secure their databases, and generally provide the crucial information and services to allow companies to make vital business decisions.
Telecom / Communication Services Sector
The telecom sector is the most recent sector of the GICS, and it includes a couple of major areas that used to be part of other sectors. It is also termed as communication services. Anyway, the telecommunication category is made of companies that ease communication on a global level. People can communicate with each other pretty easily using the phone or internet, through airwaves or cables, meaning through wires or wirelessly.
The companies have made the infrastructure that allows data in words, voice, audio, or video to be sent anywhere in the world. If looked at properly, you will find the largest companies in the sector are mobile companies, satellite companies, cable companies, and internet service providers. At the other end, the media and entertainment companies, including both older media like television and radio as well as the interactive media via the internet, are gradually increasing.
Real Estate Sector
The real estate sector consists of companies that invest in residential, commercial, and industrial real estate. These companies generate revenue from rental income and real estate capital appreciation. As a result, this sector is volatile to interest rate changes.
The residential sub-sector concentrates on the buying and selling of properties used as homes or for non-professional purposes, such as single-family homes, flats, planned unit developments, and more.
The commercial sub-sector includes real estate used for business purposes, like shopping malls, retail shops, office spaces, hotels, or other areas used for business purposes.
The industrial real estate comprises properties used to manufacture and produce a wide range of goods, such as factories, plants, and warehouses.