In high school, students are often classified based on their clique; the people who they hang out with in school. For example, in movies like “Mean Girls” the cliques were Jocks, Band Geeks, Cool Asians, Nerd Asians, Skinny Girls, Girls Who Eat Their Feelings, The Plastics, and so on. Turns out, newbies in school should know what these stereotypes are to help them get through high school peacefully.
Before we get carried away, the point here is that businesses also have their “cliques”, so to speak. These are called the market sectors. In this article, we get to know them one by one.
What Is a Stock Market Sector?
First things first. A sector is an area of the economy where businesses share the same characteristics or offer related products or services. The economy is divided into sectors to allow a more detailed and in-depth analysis of market performance and the overall state of the economy. Think of the economy as your high school and the market sectors as the different cliques in school.
For example, let’s say the economy is doing well this year. However, when individual market sectors are analyzed, turns out that some of these sectors are not doing so well, while others are really having a good year. This information can provide insight to the public about sectors that do well in a certain state of the economy or business cycle, and those that do not. It is essential to have an understanding of these sectors, as an investor, to guide your investing decision-making.
What Are the 11 Stock Market Sectors?
There are 11 stock market sectors. They include:
- Consumer Discretionary
- Consumer Staples
- Real Estate
- Health Care
- Telecommunication Services
We’ll dive into each one below:
1. Consumer Discretionary
As the term suggests, the consumer discretionary sector comprises of companies that sell non-essential goods and services. Examples include automotive, leisure equipment, luxury goods companies, retailers, theme parks, apparel, hotels, restaurants and media production.
When the economy is doing well, people tend to spend more money on non-essential items, which helps boost the performance of companies in this sector.
2. Consumer Staples
Simply put, these are the “must-haves”. These are the items consumers just could not scratch off their budget regardless of their financial situation. Consumer staples are always in demand no matter how the economy is doing. Examples include food and beverage companies, drug stores, personal care products companies, and household goods manufacturers.
Pretty self-explanatory, actually. This sector comprises of businesses involved in the exploration, production, refining, and distribution of energy resources such as oil, natural gas, and electricity. Examples include oil, gas, power generators, fuel, petroleum companies, and renewable energy companies.
This sector is made up of companies that provide financial services such as banks, insurance companies, financial institutions, brokerage firms and the like. Real estate used to be classified as part of the financial sector, but that changed in 2015 when S&P Dow Jones Indices and MSCI announced that real estate would become its own 11th sector in Global Industry Classification Standard (GICS).
5. Real Estate
The real estate sector includes companies that own and operate real estate properties such as office buildings, apartments, and shopping centers. Examples include REITs (Real Estate Investment Trusts) and property management companies.
On a related note, to learn how to grow your net worth through investing in real estate, read my article here.
Also known as the medical sector, the healthcare sector is composed of businesses offering medical-related goods and services such as hospitals, health maintenance organizations (HMO) and the like. Some other examples include pharmaceutical companies, medical device manufacturers, and clinics.
The industrial sector refers to businesses that produce goods to be used in manufacturing, construction, or transportation. Companies included in the sector produce items such as cement, industrial machinery, aerospace and defense items, lumber and metals. They also include transportation companies such as airlines and trucking firms.
All tech-related goods and services such as software and computers, the Internet, systems, databases, and electronic equipment – you get the picture – belong to the technology sector. Companies that create and sell software, internet service providers, and computer hardware producers all belong in this classification.
All of the products we consume are made up of something. Of course, everything’s gotta start from something. For instance, our televisions have wires. These wires come from companies that produce and supply them to companies like Sharp, Panasonic and Samsung. The companies that discover and develop these raw materials used in the production of other goods, such as chemicals, metals, and construction materials make up the materials sector. Examples of companies in the materials sector include mining companies, chemical producers, and paper and packaging companies.
10. Telecommunication Services
In this modern world, we almost can’t live without the means to communicate through our phones, tablets and other devices. The companies that make up the telecommunication services industry make these, and more, possible for us. These companies create the platform and infrastructure to allow our messages to pass through anywhere in the world. Without these guys, we’d still be using snail mail today!
Sure, having a house is nice but what would you do with it without electricity, water and gas? The utilities sector has got us covered for that. This sector is made up of companies that distribute electricity, water and gas to consumers like us. Examples include electric, gas, and water utility companies, independent power producers, and renewable energy companies.
The above-mentioned sectors are general classifications based on Global Industry Classification Standard (GICS) which is widely used. But different organizations may have different classifications for stock market sectors. Also, some organizations may fit into multiple sectors if they are a diverse business.