Sector and industry are ways of grouping companies based on what type of business they operate.
For example, Amazon (AMZN) is grouped into the Consumer Discretionary sector. And within that sector, it’s considered to be in the Internet & Direct Marketing Retail industry.
Other well-known Consumer Discretionary sector stocks include Home Depot (HD), Toyota (TM), McDonald’s (MCD), Nike (NKE), Target (TGT), and eBay (EBAY).
There’s a Global Industry Classification Standard (GICS) that organizes all public companies into 11 major sectors. Within those sectors, companies are broken down into industry groups, industries, and sub-industries.
You can see detailed groupings on the GICS website and below:
(NOTE: This is one of 40+ lessons in our FREE course: How to Invest in Stocks: Learn How to Buy Stocks, Make Money, and Avoid Mistakes. We’ll bring you from beginner to confident investor fast, helping you make money and avoid mistakes along the way.)
Here are the 11 major sectors that make up the stock market and a few example industries for each:
- Financials: Banks, investment funds, insurance, loans, asset management
- Utilities: Electric, gas, water
- Consumer Discretionary: Retailers, media, consumer services, auto, restaurants, lodging, entertainment
- Consumer Staples: Food and beverage manufacturing, household goods, personal products, household products, tobacco
- Energy: Oil, gas, power, refineries, pipeline operators
- Healthcare: Biotech, hospitals, medical devices, pharmaceuticals
- Industrials: Construction, defense, aerospace, machinery, hand-held tools, transportation
- Information Technology: Electronics, software, semiconductors, computer equipment, data storage
- Communications: Wireless, cable, internet providers
- Materials: Mining, chemicals, raw materials, building materials, paper products
- Real Estate: Residential, commercial, industrial real estate
You can explore all sectors and industries here with Fidelity.
What Drives Stock Returns in Each Sector?
The stocks in each sector and industry tend to look and behave similarly because they operate the same types of businesses, products, and services.
For example, tech stocks often grow their sales at a similar rate, which is very different than how fast real estate stocks grow their sales.
The same concept applies to how stocks in different sectors create profits for their shareholders.
This chart from J.P. Morgan shows how much each sector has relied on price gains vs. dividends to deliver its profits over the last 25 years.
We can see that slow-growth sectors such as Real Estate and Communications have relied heavily on dividends to drive their returns. Contrast that against fast-growth sectors like Technology and Health Care which have relied mostly on price gains to drive their returns.
Stocks in Cyclical vs. Defensive Sectors
Sectors are often divided into three categories: Cyclical, Defensive, or Sensitive.
Cyclical sectors are closely tied to the strength or weakness of the broader economic backdrop. If the economy is thriving, companies in cyclical sectors tend to thrive as well. And if the economy is struggling, cyclical sectors and companies also tend to struggle.
For example, car manufacturers, which are found in the Consumer Discretionary sector, are cyclical in nature. When the economy is thriving, unemployment is low, and wages are rising, you might feel enough financial confidence to go buy a brand new car.
But, when people are losing their jobs and the economy has dark clouds on the horizon, you might hold off on buying that new car, instead trying to stretch your existing clunker as far as you can.
These sectors are usually considered cyclical:
- Consumer Discretionary
- Real Estate
Opposite to cyclical sectors are defensive sectors.
Defensive sectors are not as closely tied to what’s happening in the broader economy. Companies within these sectors tend to perform pretty steadily, regardless of what’s happening in the economy.
For example, the Healthcare sector is consider defensive because people tend to use health services regardless of how the economy is doing. If you break your leg skiing, you’re headed to the hospital regardless of the current unemployment rate.
These sectors are usually considered defensive:
- Consumer Staples
In between cyclical and defensive are sectors considered “sensitive.”
Sensitive sectors move with the overall economy but not excessively so.
Sensitive sectors include:
- Communication Services
Research suggests that some sectors can perform better or worse during different parts of the business cycle.
The business cycle is the repeated rise and fall of economic activity over time. Historically, this cycle has gone through four major stages:
- Expansion: Economic growth is strong, unemployment is low, stocks are going up.
- Peak: The point when the expansion has reached its end and the economy is tipping towards contraction.
- Contraction: Economic growth is weak, unemployment is rising, stocks are going down.
- Trough: The point when contraction has reached its end and the economy is moving towards expansion.
This chart from Fidelity shows how different sectors are expected to perform at different points in the business cycle:
J.P. Morgan provides a giant scoreboard of each sector as of September 30, 2018.
Here are some interesting things to note:
- The Consumer Discretionary and Technology sectors have performed the best since the stock market’s low in 2009 – up 765% and 656%, respectively.
- The Energy and Communication Services sectors have performed the worst since the stock market’s low in 2009 – up 129% and 197% respectively.
- Utilities and Real Estate currently offer the highest dividend yield – both at 3.6%
- The Energy, Technology, and Materials sectors all earn more than half their sales from overseas.
- Based on P/E ratio (price to earnings ratio), Financials and Materials currently appear the most undervalued.
Sectors & Industries: Lesson Summary
Despite the fact certain sectors as a whole have performed well over the last 25 years, we wouldn’t focus on buying stocks in just those sectors.
Our research has shown you can find high-performing stocks across many sectors using proven investment strategies and styles, which we cover in Lesson 8 (see below).
Congratulations! You’ve completed Level 1 of our course on How to Invest in Stocks!
Review a summary of the major lessons you’ve learned: Level 1 Summary: Stock Market Investing for Beginners
This is the last of the publicly available lessons in our course, “How to Invest in Stocks: Learn How to Buy Stocks, Make Money, and Avoid Mistakes.”
In the next few lessons you will learn…
- 17 different ways investors make money from stocks (and which is best for you)
- Why dividends matter and how to find the best dividend stocks
- Why stock markets crash and how you can survive (and even profit)
- Common stock market myths that you shouldn’t believe
- How to develop your own personal stock investing plan
- How much money to invest in the market
- How many stocks you should buy in your portfolio
- Why diversification is important (and how to do it)
- Whether it’s actually possible to beat the market (hint: yes, it is)
Get instant access to the next two levels of this course by grabbing a free password to Uncharted INSIDER (100% free):
Level 1: Stock Market Investing for Beginners (7 lessons)
- Lesson 1: 15 Reasons Why You Should Invest in the Stock Market (See why investing in the stock market is all about learning, having fun, and making money over the long term.)
- Lesson 2: How Do You Actually Make Money with Stocks? (Understand dividends and price appreciation, the two main ways you can make money with stocks.)
- Lesson 3: How Much Money Can You Make Investing in Stocks? (Learn how much the stock market usually returns, the critical role of dividends, how much mistakes can cost you, and the astounding magic of compounding.)
- Lesson 4: 17 Basic Stock Market Investing Concepts You Need to Know (Take our “crash course” orientation on the most important basic concepts you need to get started investing.)
- Lesson 5: Stocks vs. Bonds, Mutual Funds, ETFs, Real Estate, and Robo-Advisors (Dig into the pros and cons of stocks vs other investment types; plus answer five major questions to decide which is best for you.)
- Lesson 6: Market Cap: An Overview of Small-Cap, Mid-Cap, and Large-Cap Stocks (Understand “market cap” and the six main stock sizes, plus why small stocks have outperformed large stocks by such a huge amount.)
- Lesson 7: Sectors & Industries: How Stocks Are Grouped by Business Type (Learn how stocks are grouped into sectors and industries, how each sector delivers profit to shareholders, and which sectors are best given the current economy.)
- LEVEL 1 SUMMARY: Stock Market Investing for Beginners (A brief summary of all 7 lessons that make up Level 1, which explains the basics of the stock market for beginners.)
Level 2: How to Make (and Keep) Stock Profits (5 lessons)
- Lesson 8: Investing Styles & Strategies: 17 Ways Investors Make Money in Stocks (A crash course in the common investing styles, including value and growth investing, and technical strategies like momentum and day trading.)
- Lesson 9: Dividend Stocks: How Yield & Income Can Boost Your Investing Profits (Understand how dividends work, why yield finds the best dividend stocks, how much dividends contribute to returns, and why reinvestment matters.)
- Lesson 10: Stock Market Crashes: Why Markets Decline & How to Survive (Find out what causes stock markets to decline, how much they fall and how fast they recover, and what you can do to stay calm and profit from a sell off.)
- Lesson 11: What Are the Risks of Investing in Stocks? (We outline the most common investing risks that impact the entire stock market, certain sectors and industries, individual companies, and single investors.)
- Lesson 12: 18 Stock Market Investing Myths Debunked (Let’s walk through the most common myths about investing in stocks and understand why they’re simply not true.)
- LEVEL 2 SUMMARY: How to Make (and Keep) Stock Profits (A brief summary of all 5 lessons that make up Level 2, which explains how to make and keep stock market profits.)
Level 3: Build Your Personal Stock Investing Plan (6 lessons)
- Lesson 13: Can You Really Beat the Market by Buying Your Own Stocks? (See how two investors have consistently beaten the market over time using very different strategies, and discover four simple strategies that beat the market.)
- Lesson 14: What’s the Best Investment Strategy for You? (Walk through four popular investment strategies and decide which are best for you. Plus see how and where you can apply them for high returns and low risk.)
- Lesson 15: How Much Money Should You Invest in Stocks? (Find out how much money you need to start investing in stocks, how much money you should aim to invest over time, and the critical mistakes to avoid.)
- Lesson 16: How Many Stocks Should You Own? (Discover why most investors own between 10-30 stocks in their portfolio and how to stay diversified based on your investing strategy.)
- Lesson 17: How to Diversify Your Stock https://unchartedinvesting.com/blog/how-to-diversify-your-stock-portfolio//blog/how-to-diversify-your-stock-portfolioPortfolio (Find out why /diversity can boost your investing returns and reduce your risk. Review the six rules of stock portfolio diversity and when to break them.)
- Lesson 18: How Taxes Impact Your Stock Investing (Let’s review the seven main types of investment taxes, understand how they impact your portfolio, and discuss some (legal) ways to reduce your investing taxes.)
- LEVEL 3 SUMMARY: Build Your Personal Stock Investing Plan (A brief summary of all 6 lessons that make up Level 3, which explains how to build a personal stock investing plan.)
Level 4: How to Research and Buy the Best Stocks (12 lessons)
- Lesson 19: How to Read a Stock Quote (with Handout Cheat Sheet) (An overview on how to read and understand a stock quote; PLUS a free stock quote “cheat sheet” for your download.)
- Lesson 20: How to Find the Best Stocks to Buy (with Handout Cheat Sheet) (A step-by-step guide to finding the best stocks, with screenshots; PLUS a free “cheat sheet” for your download.)
- Lesson 21 (Growth Investing): A Step-by-Step Guide to Picking the Best Growth Stocks (Discover which growth stocks perform best; includes a step-by-step guide to find the best growth stocks with screenshots & pre-filtered screens.)
- Lesson 22 (Value Investing): A Step-by-Step Guide to Picking the Best Value Stocks (Discover which value stocks perform best; includes a step-by-step guide to find the best value stocks with screenshots & pre-filtered screens.)
- Lesson 23 (Small Cap Investing): A Step-by-Step Guide to Picking the Best Small Cap Stocks (Discover which small cap stocks perform best; includes a step-by-step guide to find the best small cap stocks using pre-filtered screens.)
- Lesson 24 (Large Cap Investing): A Step-by-Step Guide to Picking the Best Large Cap Stocks (Discover which large cap stocks perform best; includes a step-by-step guide to find the best large cap stocks with screenshots & pre-filtered screens.)
- Lesson 25 (Blue Chip Investing): A Step-by-Step Guide to Picking the Best Blue Chip Stocks (Discover which blue chip stocks perform best; includes a step-by-step guide to find the best blue chip stocks using pre-filtered screens.)
- Lesson 26 (Dividend Investing): A Step-by-Step Guide to Picking the Best Dividend Stocks (Discover which dividend stocks perform best; includes a step-by-step guide to find the best dividend stocks with screenshots & pre-filtered screens.)
- Lesson 27: The Magic of Combining Investment Strategies (When it comes to finding the best stocks to buy, many investors focus on value, growth, blue chip, dividend, or small cap stocks. We propose a better way.)
- Lesson 28: Investing Styles Cheat Sheet (Handout) (Six lessons on how to find the best small cap, large cap, growth, value, blue chip, and dividend stocks summarized in a downloadable handout “cheat sheet.”)
- Lesson 29: How to Profit During Economic Recessions (This lesson covers how to spot an upcoming recession and play “defense” or “offense” to either avoid or profit from the large decline in the market.)
- Lesson 30: Intro to Profit Lab: Proven Ways to Profit from Stocks (Profit Lab is our original strategy series where we share proven ways to profit from stocks.)
- LEVEL 4 SUMMARY: How to Research and Buy the Best Stocks (A brief summary of all 12 lessons that make up Level 4, which explains how to research and buy the best stocks.)
Level 5: When to Buy and Sell Your Stocks (4 lessons)
- Lesson 31: Why “Buy and Hold” Is a Dangerous Strategy (Investors are often told to “buy and hold” their stocks. We share several examples of why it’s a dangerous strategy and outline what you should do instead.)
- Lesson 32: When Should You Buy a Stock? (Plus Handout: “Stock Buyer’s Checklist”) (We walk through a 5-step checklist to decide exactly when to buy a new stock. Comes with a course handout for download.)
- Lesson 33: When Should You Sell a Stock? (Plus Handout: “Stock Seller’s Checklist”) (We walk through a 10-step checklist to help you decide exactly when to sell a stock. Comes with a course handout for download and future reference.)
- Lesson 34: How to Buy and Sell Your Stocks (Best Brokers, Order Types, and More) (Review the best stock brokerages, account types, how to use market orders, limit orders, stop loss orders, when to place trades, and more.)
- LEVEL 5 SUMMARY: Whhttps://unchartedinvesting.comen to Buy and Sell Your Stocks (A brief summary of all four lessons that make up Level 5, which explains when to buy and sell your stocks.)
Level 6: The Most Powerful Insights for Profitable Investing (9 lessons)
- Lesson 35: What to Expect Once You Start Investing in Stocks (There are many things about stock investing that often surprise new investors, such as analyst estimates, earnings reports, market volatility, and more.)
- Lesson 36: The 23 Biggest Mistakes Investors Make (And How to Avoid Them) (There are 23 common mistakes that new investors make which tend to destroy their investing profits. We explain how to spot and avoid these common mistakes.)
- Lesson 37: The 10 Most Powerful Metrics in Investing (with Handout) (We explain the 10 best metrics for finding profitable stocks to buy. They include four growth metrics, two value metrics, three dividend metrics, and one more.)
- Lesson 38: The Psychology of Successful Investing (+10 Extra Bonus Tips) (Understand the 22 cognitive traps that set investors back and hurt their long term returns. Plus 15 powerful questions to avoid these common mistakes.)
- Lesson 39: Dangerous Stock Market Scams & Rip-Offs (And How to Avoid Them) (We cover many common stock market scams and share the “red flags” to watch for. Included are tools and strategies for avoiding scams and rip-offs.)
- Lesson 40: The 50 Laws of Stock Market Success (We pull together the most powerful lessons, insights, concepts, and strategies from our entire course into a collection of The 50 Laws of Stock Market Success.)
- Lesson 41: The 26 Best Books on Stock Market Investing (These 26 must-read books on stock market investing include titles on how to pick the best stocks, value investing, trading psychology, and more.)
- Lesson 42: The Giant List of Must-Have Tools and Resources for Stock Investors (This giant list of must-have tools for stock investors includes analyst estimate summaries, sentiment readers, calculators, stock screeners, and more.)
- Lesson 43: Our #1 Lesson on How to Invest in Stocks (Closing Thoughts) (Of the many strategies in this course, the #1 lesson stands out above all the rest. Investors who follow this strategy will advance miles ahead of others.)
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