Stocks are often classified by the type of businesses they represent. Companies in similar industries are put together in order to compare them accurately. These groupings of stock are referred to as sectors.
You will often hear news and analysis of certain sectors. Most investors recognize 11 sectors that are broke into two categories: defensive and cyclical. There are two cycles in the defensive category and nine in the cyclical category.
The defensive stocks are made up of utilities and consumer staples. The companies provide services and products that are always in demand. They rarely see a large market downturn due to this. People aren't going to stop using energy.
Defensive stocks are great for balancing a portfolio and protecting your investments from falling markets. But, they don't often climb when the market rises. People will continue to use the same amount of energy and eat the same amount of food regardless of the market. While they are great for protecting you from a falling market, they don't benefit you in a rising market.
Cyclical stocks include the remaining nine sectors:
- Basic Materials
- Consumer Cyclical
- Energy
- Capital Goods
- Communications
- Financial
- Health Care
- Technology
- Transportation
These sectors all involve businesses that you can easily identify. They are cyclical because they go up and down due to business cycles and other influences. For example, the basic materials sector can be affected by the rising housing market. They can also feel the pinch when interest rates are up, the housing market is down and there is a reduced demand for building materials.
Cyclical stocks are often unpredictable. They are up and down. Remember, one sector can be going up while another is going down.
Using stock sectors can be helpful in comparing companies and sorting through stocks. Different companies will use different sectors, so look around and compare your stocks wisely.
For example, if the other stocks in a sector are up 10%, but your stock is down 4%, you need to know what is going on with your stock. If the numbers are reversed, you still need to know why it is performing the way it is. Remember, if a business model changes, the stock could be moved to a different sector.
Sector information will help you compare a company to its peers. It will help you understand whether or not you have a potentially good investment. However, you should be careful when comparing between sectors. Know what you are looking at when you compare stocks.
Martin Lukac http://www.MartinLukac.com , represents http://www.RateEmpire.com , an Internet consumer banking marketplace. RateEmpire.com is a destination site of personal finance, investing, taxes and mortgage rates. RateEmpire.com provides mortgage guides and financial rates and information. RateEmpire.com also operates a financial portal #1 American Financial, found at http://www.1AmericanFinancial.com