When you think of day trading, “stock market sectors” aren’t exactly the first thing to come to mind, right?
But if your goal is to be a killer trader, you must understand the different stock sectors and why they matter. It’s important and you need to know it.
So let’s do this. Here’s a breakdown of stock market sectors explained, what stock sectors are, a list of the 11 different stock market sectors, and some tips on how to use them to your advantage.
Table of Contents
- 1 What’s a Stock Sector?
- 2 The 11 Different Stock Sectors
- 3 How These Stock Market Sectors Performed in 2020
- 4 How to Access Different Stock Sectors
- 5 Importance of Diversifying Your Investments
- 6 What Are the Best Stocks in Each Sector to Trade Now?
- 7 Frequent Questions About Stock Sectors
- 8 The Bottom Line
What’s a Stock Sector?
There are thousands of companies in the stock market.
Each stock is in a sector. So each stock you invest in fits into a specified sector. The sectors generally track the overall sectors of the economy. (If the word “sector” doesn’t appeal to you, you can just think of them as categories.)
According to the Global Industry Classification Standard, there are 11 different stock sectors. These are sometimes referred to as GICS sectors.
Understanding the sectors and why they’re important for stock trading can give you an edge in the market. So let’s look at all the stock market sectors now …
Here’s a look at each sector, along with some of the largest and best known companies in each.
The energy sector contains oil, gas, coal, and fuel companies, as well as energy equipment and services companies — the ones that build oil-drilling equipment or provide services to oil companies.
Your major players in this sector are Exxon, Shell, Chevron, BP, Kinder Morgan, Schlumberger, and Halliburton. These companies typically generate billions of dollars in profit every quarter and can pay generous dividends.
This sector moves in correlation with the price of crude oil. If crude oil’s falling, you can bet that the companies in this sector are falling as well. However, these companies’ stock prices are usually stable, and their generous dividends can make them a good long-term hold, if you’re into that kind of thing. They may also be a good choice if you’re looking to get defensive in a rough market.
The basic materials sector stocks are chemical, construction materials, packaging, metals, and paper.
Materials companies usually operate in the business-to-business space, meaning they sell their products to other companies. They provide the key supplies that go into the products that you and I purchase.
These companies are at the beginning of the supply chain. They make the steel for cars, the wood for homes, the plastics for packaging, etc.
DowDuPont, Ecolab, Valvoline, Scotts Miracle-Gro, and Sherwin-Williams are all in the materials sector.
Next up is the industrials sector. The defense, machinery, aerospace, airlines, construction, and manufacturing companies are in here.
A lot of large-cap companies are in this sector. Boeing, 3M, Honeywell, UPS, Delta, Lockheed Martin, Deere, and Caterpillar — they’re all industrials.
Much like the oil companies, the industrials generate lots of cash flow and have stable dividends. If defense budgets around the world are increasing, you can bet that more cash will be flowing to the defense companies in this sector.
The fourth sector on our list is consumer discretionary. You and I spend a lot of our money with these companies. It’s where our discretionary income goes. It’s the retailers, apparel companies, restaurants, car companies, hotels, media, and household products companies.
You’ve heard of the companies in this sector. It’s where Amazon, Home Depot, Ford, Wynn, Starbucks, Target, and Chipotle are. We shop, eat, and travel with these companies.
When consumer confidence is high and people are spending their money like no end, these companies are making bank and they’ll probably have strong quarterly earnings.
Consumer staples are the food, beverage, and tobacco companies. They’re also manufacturers of household goods and personal products. The category also includes supermarkets.
You’ve likely heard of many of the companies in this sector because they sell products to you. They include Walmart, Coca-Cola, Procter & Gamble, Costco, Kraft Heinz, Estée Lauder, and many more.
The consumer staples sector is considered a defensive sector because it’s generally resilient in the event of an economic downturn.
Unlike consumer discretionary companies, consumer staples companies make products that people buy on a regular basis. They also include supermarkets like Walmart. Discretionary products are products that people don’t need to purchase.
People don’t need to buy new cars, clothes, or eat at restaurants. But they need to buy food and household goods — and they’ll likely buy those things from supermarkets.
Pharmaceuticals, healthcare equipment, and healthcare services companies are in the healthcare sector. Johnson & Johnson, Pfizer, Merck, Medtronic, and UnitedHealth are some of the bigger companies.
Many view companies in the healthcare sector as good and safer plays because people will always need medical care.
The financial sector consists of banks, insurance companies, and real estate companies.
This sector is closely tied with interest rates. If interest rates rise, big banks make a lot more money. That’s because banks give out loans and mortgages, and the higher interest rates all go to the banks.
JPMorgan, Bank of America, Wells Fargo, U.S. Bancorp, Goldman Sachs, and many regional banks are in this sector.
Commonly referred to as the “tech sector,” companies in this sector include internet, software, and semiconductor companies. Also included are companies that manufacture electronic equipment, data processing, communication equipment, and IT services.
Microsoft, Intel, Visa, MasterCard, Adobe, Salesforce, and Square are some of the largest companies in the tech sector.
The tech sector’s been one of the leading sectors the last few years.
This sector is communication services companies. You know them as Verizon, AT&T, T-Mobile, Sprint, Comcast, Charter, Netflix, Facebook, and Google.
Most of the companies in this sector rely heavily on recurring revenue, while some others earn the bulk of their revenue from advertising revenue (think Facebook and Google).
These companies are your electric, gas, and water utilities. They have little to no competition in the areas where they operate, and local governments regulate most of their prices.
Since these companies operate regionally (i.e., there isn’t one national electric or water provider in the U.S.) you’d likely only recognize your local utility. Some of those utilities are Duke Energy, NextEra, PG&E, Xcel, and NRG.
These are considered defensive sectors because people will always need what these companies sell. They’re subject to heavy government regulation, but they’re often safer bets in a shaky market.
This last one is pretty self-explanatory. It’s real estate companies called REITs (real estate investment trusts) and real estate developers.
They operate apartments, malls, offices, and senior living communities. If you have a relative in a nursing home, chances are the company operating that community is publicly traded in the real estate sector.
Companies in this sector earn their revenue from rent income and rising property values. And since they pay out at least 90% of their taxable profit as dividends to shareholders, some investors take long-term holds in these stocks and expect dividend checks every three months.
One prominent company in this sector is Simon Property Group, which operates malls. AvalonBay Communities and Aimco are some of the larger apartment operators.
How These Stock Market Sectors Performed in 2020
Energy sector stocks were hardest hit in 2020. We saw oil go negative for the first time in history in March as supply surged.
We still haven’t returned to traveling or driving and commuting like we used to. Who knows if oil will ever go back to the way it was?
And there’s more investment in green energy. Recent interest in Tesla Inc. (NASDAQ: TSLA) and the whole EV sector is proof that many investors are looking for alternatives in the future.
The Nasdaq and tech stocks led the recovery after the crash in March. Popular trading apps like Robinhood brought more millennials into the market, and they started buying up their favorite tech companies.
Consumer cyclical stocks took a hit in 2020 as people tightened spending in the first half of the year. Airlines and cruise companies still haven’t recovered.
How to Access Different Stock Sectors
To access and trade the different stock market sectors, you need to have a brokerage account.
You can trade each individual sector by trading an exchange-traded fund (ETF).
Think of ETFs as a group of stocks all placed into one fund. And you can buy that fund. ETFs are less volatile, which can make them great for beginner traders who can be scared off by rapid (and sometimes extreme) price movements.
There’s a group of ETFs called the SPDR, managed by State Street Global Advisors. The SPDR ETFs are very popular, and in the SPDR group, there’s an ETF for each sector.
Here’s a list of each sector and the corresponding SPDR ETF:
- Energy — XLE
- Basic Materials — XLB
- Industrials — XLI
- Consumer Discretionary — XLY
- Consumer Staples — XLP
- Healthcare — XLV
- Financial — XLF
- Information Technology — XLK
- Communications — XTL
- Utilities — XLU
- Real Estate — XLRE
You can use your brokerage to invest in and trade these ETFs. Since an outside company manages them, they have fees in the form of an expense ratio. This charges shareholders a percentage (usually less than 1%) of the fund’s total assets. That money goes toward administrative, management, advertising, and other expenses.
You can also invest and trade individual stocks that are in a sector. For example: If you bought stock in Ford, you’re buying a stock in the consumer discretionary segment.
Key Different Stock Sectors in the European, Asian, and Canadian Stock Markets
The European, Asian, and Canadian stock markets have the same sectors as the U.S. stock market. This similarity gives investors the opportunity to compare stock market sectors across countries.
Importance of Diversifying Your Investments
You know the saying, don’t put all your eggs in one basket?
That’s especially relevant to the stock market.
Why? Because stocks in the same sector tend to move together. So if some energy stocks are down, chances are others will be as well. That’s why you need to diversify your investments and make sure you’re spread into different sectors and increasing your exposure to some more defensive sectors.
This is precisely why understanding stock sectors is so important!
To help you understand why tracking different stock sectors performance is important, let me give you an example.
Let’s say last year you decided to invest in five stocks and hold them for the duration of 2019. And for all five stocks you chose energy stocks because you hypothesized that they would have a good year.
As you can see, that strategy would turn out very poorly. Energy was one of the worst-performing sectors in 2019. If you had instead picked stocks in separate sectors (diversifying your investments) you would have fared better.
You could’ve invested in real estate, tech, financials and consumer goods in addition to your energy stocks. This would be a more balanced portfolio with exposure to different areas of the market.
See? Don’t put all your eggs in one basket!
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What Are the Best Stocks in Each Sector to Trade Now?
I don’t care which stock market sector’s performance is the best from an investor’s standpoint. I look for penny stocks in hot sectors. If a sector has no volume or volatility then I’m not interested. I focus on big percent gainers. If it’s in a hot sector, that’s even better.
If you want to see which penny stocks I’ve got my eye on at the moment, sign up for my no-cost weekly watchlist.
In 2020, I’ve focused on stocks moving on news related to the pandemic. These can be stocks in any sector — healthcare, industrials, and even the energy sector.
When there’s a big development like this global pandemic, everyone wants to try to profit, not just traders. Companies are all trying to get in on the action.
Even marijuana companies got in amid talk of cannabis as a potential treatment for the coronavirus. Of course, that kind of hype never lasts, but I want to be where the news, promotion, volume and volatility are.
That’s where the opportunities are. Ready to learn my go-to strategies for navigating and trading penny stocks? Start with my FREE online guide here.
Electric Vehicle Stocks
The electric vehicle (EV) sector was hot in 2020. Tesla Inc. (NASDAQ: TSLA) started its crazy run, before a stock split brought its share price back down to earth.
That interest and huge price increase brought investors into other EV companies. That included Chinese automakers, battery companies, lithium companies … anything that could be tied to the EV market.
We even saw some solar energy companies get attention. Never underestimate a hot sector. Be ready to take advantage of the opportunities and always look for sympathy plays.
Prepare Yourself to Invest in Different Stock Sectors
Before you dive in and start picking your favorite stock market sectors, you need to gain an understanding of each sector.
Start with a bird’s-eye view … look at the yearly performance of each sector, and then narrow to the monthly performance, and then daily performance. Major news sources report the daily S&P performance of different stock sectors, so you can keep on top of the trends.
Keep an eye on how the sector has performed over the last year.
Granted, past performance doesn’t predict future results … but remember, the trend is your friend. If the trend is down, you probably don’t want to be buying and hoping it turns around. In the stock market, hope won’t get you very far.
If you’re looking to day trade or swing trade, monthly or daily performance overviews will be useful. Find the sectors that are performing well today, and then look at some of the strongest stocks in that sector. Pull up the charts and do some technical and fundamental analysis.
Keep in mind that just because a sector is having a strong day, that doesn’t guarantee it will last any longer than that day.
For example, if the price of crude oil rises, a stock like ExxonMobil (NYSE: XOM) will likely rise as well. But crude is subject to a lot of catalysts, which means that it can reverse direction quickly, and Exxon’s stock can too.
Just like any good trader, be sure to time your entries and exits well and cut losses quickly.
Most traders fail. That’s because they enter trades without any plan.
They buy a stock because they like the company or because their friend told them to buy it. Then once they’re in the trade, their only plan is to hope the price goes up. Remember what I said earlier? I’ll say it again: Hope is not a strategy.
When it comes to trading, hope straight-up sucks. You will fail with this “plan,” and all the hopes and dreams you had of becoming the next millionaire day trader will soon be gone — along with your money.
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Frequent Questions About Stock Sectors
What’s a Stock Sector?
Stock market sectors represent the sectors of the economy.
What Are the 11 Stock Sectors?
1.) Energy 2.) Materials 3.) Industrials 4.) Consumer Discretionary 5.) Consumer Staples 6.) Healthcare 7.) Financials 8.) Information Technology 9.) Communication Services 10.) Utilities 11.) Real Estate
What’s a Sector Breakdown?
A sector breakdown is a term used to explain how a portfolio or fund is diversified into different sectors. It can give investors an idea of what percentage of the fund is allocated to each sector to help them decide where to invest.
What Stock Sectors Are Hot Right Now?
Hot sectors change based on any number of economic factors. What’s hot today may not be hot tomorrow.
What Sectors Perform Best in a Recession?
Energy, utilities, healthcare, and consumer staples often outperform other sectors during a recession. Some sub-sectors also do well. For example, certain types of consumer discretionary spending. (Affordable luxury.)
Which Sector Is Down the Most?
The energy sector has been underperforming the S&P 500 Index since the beginning of 2020. It was beaten down even more in the pandemic crash in March 2020, when oil went negative for the first time in history.
The Bottom Line
Stock sectors might not be the most exciting facet of your trading education, but you need to know about them if you want to be a part of this world.
If you plan to put your hard-earned money into a stock, you’d better know how its sector has performed. Coming in blind without any knowledge of the way it operates in can be a recipe for disaster. And that’s why sectors matter.
Here’s a better strategy:
- Start by getting yourself familiar with how the different stock sectors performed over the last year.
- Then begin your trading day by checking to see how the different stock sectors are performing for the day.
- Understand why they’re moving in their current direction.
- Then start hunting for some stocks you’d like to go long or short on.
Got it? Good. Doing this can get you off to a better start as a trader because you’ll know which stocks have momentum behind them and which have some headwinds.
Do you have a favorite sector you trade? Let me know in the comments … I love to hear from you!
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