The stock market comprise of stocks from different sectors and industries. The grouping of stocks into various categories makes it easier to track, analyze and compare performances of different stocks. Based on their business nature, stock market sectors range from energy, capital goods, technology to financial, health care and consumer products, among others. Each sector has its own level of risk and may experience changes from time to time. Different sectors likely perform differently under given economic conditions. Investor knowledge about particular sectors can also play a role in deciding which sector of the stock market to invest in.
A current economic condition can hinder or boost stocks of different sectors of the market. While a downward economy prevents many sectors from growing, certain sectors known as defensive plays may be able to sustain their performances. Defensive sectors may include consumer staples, utilities, health care and some stocks in the services sector, for example, retail grocery. Defensive plays are necessities in the economy, and can make good investments in a down market. On the other hand, in a growing economy, sectors such as energy, basic materials, capital goods and consumer cyclical may be in greater economic demands, and likely outperform the rest of the market.
Regardless of the effects from economic conditions, stocks in some sectors are inherently riskier than stocks in other sectors. For example, energy stocks are subject to geopolitical risks, financial stocks are vulnerable to regulatory uncertainties and technology stocks are bound for some failures over time. In addition to any risk factors in business operations, capital-intensive sectors such as basic materials in mining and heavy industrial machinery goods may face potential shortage in capital investments when without proper financing. Sectors of utilities and consumer non-cyclical may be more stable but their returns also tend to be steady with little upside gains.
Investors should reevaluate certain sectors from time to time when the economy and the markets have evolved in terms of product development and any shift in consumer demand. Investors may consider re-allocating their investments among sectors following any significant sector changes. For example, with all the talks about alternative energy sources, energy-sector investors may want to diversify their investments of traditional oil and gas holdings to include some newcomers of solar and wind initiatives. Meanwhile, investors in sectors of basic materials or capital goods may decide to double down their investments, given that the growing global economy has created more consumer demand on raw materials and machinery from countries pursuing industrialization.
When investors try to decide which sector of the stock market they should invest in, their knowledge and interest about particular sectors can also play a role in the decision- making process. Investing in sectors that investors are not familiar with potentially adds more risks to their investments, if investors are not able to predict and respond properly to any sector change. Thus, someone who is a technology junkie shouldn’t have problems investing in the technology sector. However, without much knowledge about ocean transportation, an investor may want to avoid the sector unless having conducted extensive studies.