Overall there are 11 different market sectors, but what are they and why should I care? We don’t want to assume you know what market sectors are or how they work, so let’s quickly cover the basics of sectors before we move forward.
Q. What is a market sector?
A. The easiest way to explain market sectors or stock market sectors is to think of them as specific parameters or guidelines that dictate how a stock is organized and classified.
Let’s take a quick stroll through your kitchen for a minute for an easy illustration. If you open your pantry right now, most likely it is filled with lots of different types of food. You might have some cereal, cans of soup and beans, rice and pasta and all kinds of snacks like chips, pretzels and nuts. If we broke your pantry into “sectors”, we would come up with ones like breakfast foods, canned foods, grains and snacks. When you hear the name “snacks” you can quickly identify with the type of foods that fall into this type or sector.
Stock market sectors work the same way. They look at the nature of the business that the stock is representing and they assign it a category or sector.
- Materials Sector – At it’s core, a company that is classified in the materials sector means their primary function is to take natural materials and resources and make, produce or create something useful and beneficial from those resources. Some examples of companies in this sector are logging, steel, metals, chemical and often times oil and natural gas organizations also fall into this sector as well.
- Industrial Sector – Industrial sector companies or stocks most commonly refer to those involved with the use of heavy equipment and machinery. Transportation, logistics, defense, construction and engineering companies are the most common in this sector but it also includes those that make building products and electrical equipment.
- Utilities Sector – The utility sector encompasses all the different types of utility companies out there. From those that deliver electrical power and natural gas to the water delivery organizations. It can also include those that produce the renewable electricity and power.
- Healthcare Sector – The healthcare sector is a little different than most would think. It doesn’t include hospitals, clinics and ERs but it has two primary types. One type is for those that develop pharmaceuticals and the biotech space. The other focuses on healthcare equipment and services, like surgical supplies, medical diagnostic tools, and health insurance.
- Energy Sector – The energy sector mostly covers companies in the oil and natural gas industry. It includes things like oil and gas exploration and production, as well as producers of coal and ethanol. It also includes the businesses that provide equipment, materials, and services to the oil and gas producers. Renewable energy companies are not part of the energy sector however, as they are categorized under utilities.
- Consumer Discretionary Sector – The consumer discretionary sector is aptly named as it has everything to do with discretionary income and not at all tied to your day-to-day necessities. All companies in this category sell directly to consumers and not to businesses. Think of items like automobiles, apparel/clothing, hotels, restaurants, leisure-related businesses and luxury goods.
- Consumer Staples Sector – Unlike the consumer discretionary sector, the consumer staples sector is all about companies who sell goods and services that consumers need, regardless of their finances. It includes companies in the food & beverage, and tobacco industries, as well as personal care and everyday household products.
- Financials Sector – Simply put, the financials sector includes businesses that are related to handling money. In this group you have banks, insurance companies, consumer finance providers, brokerage houses and mortgage-related real estate investment trusts.
- Information Technology Sector – The information technology sector is mostly made up of three main pillars including; software, hardware and semiconductors. The information technology sector contains all the essential companies needed to drive today’s internet-powered and connected world.
- Communication Services Sector – Formerly known as the Telecom Sector, the Communication Services Sector was renamed and redefined in 2018. Wireless telecommunication and old-style landline communication services, make up one wing of this sector. The other is comprised of media and entertainment companies, including television, radio, interactive media and other newer forms of communication channels.
- Real Estate Sector – The real estate sector is generally broken up into two types of companies. Those that develop new real estate projects and the subsequent property management needed after the construction has been completed. Secondly, most REIT’s or real estate investment trusts, which are special tax-favored business entities in the real estate industry, get counted within the real estate sector.