FOR TOMORROW KEEP AN EYE ON - MARUTI, JINDALSTEL
One of the ways investors classify stocks is by type of business. The idea is to put companies in similar industries together for comparison purposes. Most analysts and financial media call these groupings sectors and you will often read or hear about how certain sector stocks are doing.
One of the most common classifications breaks the market into 11 different sectors. Investors consider two of their sectors defensive and the remaining nine cyclical. Let’s look at these two categories and see what they mean for the individual investor.
One of the ways investors classify stocks is by type of business. The idea is to put companies in similar industries together for comparison purposes. Most analysts and financial media call these groupings sectors and you will often read or hear about how certain sector stocks are doing.
One of the most common classifications breaks the market into 11 different sectors. Investors consider two of their sectors defensive and the remaining nine cyclical. Let’s look at these two categories and see what they mean for the individual investor.
Defensive
Defensive stocks include utilities
and consumer staples. These companies usually don’t suffer as much in a market
downturn because people don’t stop using energy or eating. They provide a
balance to portfolios and offer protection in a falling market.
However, for
all their safety, defensive stocks usually fail to climb with a rising market
for the opposite reasons they provide protection in a falling market: people
don’t use significantly more energy or eat more food.
Defensive
stocks do exactly what their name implies, assuming they are well run
companies. They give you a cushion for a soft landing in a falling market.
Cyclical stocks
Cyclical stocks, on the other hand, cover
everything else and tend to react to a variety of market conditions that can
send them up or down, however when one sector is going up another may be going
down.
Here is a list
of the nine sectors considered cyclical:
·
Basic Materials
·
Capital Goods
·
Communications
·
Consumer Cyclical
·
Energy
·
Financial
·
Health Care
·
Technology
·
Transportation
Most of these sectors are
self-explanatory. They all involve businesses you can readily identify.
Investors call them cyclical because they tend to move up and down in relation
to businesses cycles or other influences.
Basic materials, for example,
include those items used in making other goods – lumber, for instance. When the housing market is active, the
stock of lumber companies will tend to rise. However, high interest rates might
put a damper on home building and reduce the demand for lumber.
How to Use
Stocks
sectors are helpful sorting and comparison tools.
·
US Stock Market
·
Stocks to Invest In
·
Trading Stock
·
Shares and Stocks
·
Where to Buy Stocks
Don’t
get hung up on using just one organization set of sectors, though. Use slightly different sectors in its tools,
which let you compare stocks within a sector.
This is extremely helpful, since
one of the ways to use sector information is to compare how your stock or a
stock you may want to buy, is doing relative to other companies in the same
sector.
If all the other stocks are up
11% and your stock is down 8%, you need to find out why. Likewise, if the
numbers are reversed, you need to know why your stock is doing so much better
than others in the same sector – maybe its
business model has changed and it shouldn’t be in that sector any longer.
