What Are the Stock Sectors?
There are thousands of companies with stocks trading on the stock market, and these companies are in many different industries. Companies in the same industries will often have the same financial results. The stock market sectors are a way to organize the large number of stocks into groups in the same or similar industries.
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Significance
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Dividing the stock market into different sectors allows investors to analyze industry groups as a whole. Stocks in the same sector tend to move in the same direction. For example, stocks of companies in the energy sector will move in the same direction based on the prices of energy and the economic outlook. Telecommunications stocks will move together in a market cycle specific to this industry. Individual stocks may provide different results from the overall sector, but most will follow the sector trends.
Considerations
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There are several different ways to divide the universe of individual stocks into sectors. Standard & Poors uses the Global Industry Classification Standard--GICS--to divide the stocks in the different S&P stock indexes into 10 broad market sectors. The NASDAQ website provides a market sector indices list with over 60 different indices for different market sectors. The sectors divide the market into more focused areas. The NASDAQ has sectors ranging from Community Banks to Global Energy Efficient Transport.
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Major Sectors
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The S&P 500 is a stock index of the 500 largest companies in the U.S. S&P uses 10 sectors in the S&P 500 and provides return data for each sector. Here are the S&P 500 stock market sectors:
Energy
Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Telecommunications Services
Utilities
Potential
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The growth in the number of available exchange traded funds--ETFs--has simplified the process of sector investing. ETFs are available to cover any market sector that is of interest to an investor. State Street Global Advisors provide ETFs for all of the S&P 500 sectors through the SPDR series of funds. More focused sector ETFs are also available. Examples are funds for renewable energy, gold mining companies or real estate investment trusts--REITs.
Misconceptions
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Stock market investors should understand the different market sectors to avoid over-weighting their portfolios in one or two sectors. It is easy to purchase a stock in one sector, such as technology or energy, and buy more stocks in the same sector. A portfolio diversified into multiple sectors will be less volatile and the investor will be able to generate profits when the different sectors come into favor or are more appropriate for the current economic conditions.
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