Published: October 9, 2018 | Blog Post
Part of the process new clients go through at BTC Trading is developing a personalized investment plan, which generally includes a breakdown by asset class and sector. Novice investors often ask what the difference is between a sector and an industry. This is a simple yet important concept to understand to effectively participate in the investment decision making process.
Stock markets and economies in general are broken down into eleven major categories that are called sectors. A sector is an area of the stock market or the economy with companies engaged in similar types of businesses. Dividing markets and economies into sectors allows for better analysis of what is happening in the stock markets and general economy. Sectors are then broken down into industries. Industries are sub-sectors engaged in even more closely aligned products and services. Businesses within the same industry are likely to be in competition with one another.
The research analysts at BTC Trading, like most brokerage firms, will generally specialize in one or two sectors of the market. From there, they will select individual recommendations from the industries within their chosen sectors. There is a lot to understand about an industry in general in order to properly analyze individual companies, and this is standard practice within the investment community.
The Global Industry Classification Standard was developed by the S&P and the MSCI to standardize coding throughout the financial industry. This is important for trading and market statistics publication as well as analysis. BTC Trading recommends that portfolios should be diversified among as many sectors as possible, which is why it’s important for investors to understand the difference between sectors and industries, which are simply sub-sectors. Markets are broken down into 11 broad sectors:
• Consumer Discretionary
• Consumer Staples
• Health Care
• Information Technology
• Real Estate
• Telecommunication Services
Examining sectors and industries helps one understand how businesses interact with each other, and how something impacting one area can affect another area, which is a good way to look for opportunities. Let’s say for example that the price of oil is dropping. Oil stocks are in the Energy sector, so this may not be bullish for oil stocks. But if the price of oil is lower, this would be good in general for transportation stocks and so one might take a closer look at related companies. The transportation industry falls within the Industrial Sector. Given the assumption about oil prices, a comparison among industries may yield an investment opportunity with more upside. It always pays to look at the bigger picture.
INDIVIDUAL SECTOR BREAKDOWN
For illustration purposes, the S&P Industrials sector is further broken down into 12 Industries (with examples), listed in descending order of size. These are not to be taken as recommendations:
1. Aerospace and Defense – Boeing (NYSE: BA)
2. Industrial Conglomerates – General Electric (NYSE: GE)
3. Machinery- Caterpillar (NYSE: CAT)
4. Road and Rail – Union Pacific Corporation (NYSE: UNP)
5. Air Freight and Logistics – Fedex Corporation (NYSE: FDX)
6. Airlines – American Airlines Group (NYSE: AAL)
7. Electrical Equipment – Emerson Electric Company (NYSE: EMR)
8. Commercial Services and Supplies – Cintas Corporation (NASDAQ: CTAS)
9. Professional Services –Equifax Inc. (NYSE: EFX)
10. Trading Companies and Distributors– W.W. Grainger, Inc. (NYSE: GWW)
11. Construction and Engineering – Jacobs Engineering Group, Inc. (NYSE: JEC)
12. Building Products – Masco Corporation (NYSE: MAS)
Different sectors of the market perform differently over time. Some sectors perform better over the long term, some perform better during periods of growth and some in periods of recession. For example, consumer discretionary sector stocks tend to perform better during a bull market. People feel more confident and they spend more money. Conversely, Consumer Staples stocks do better in a bear market. So go long Tiffany & Co. at the beginning of the Bull Run, and buy BUD when the bear starts to growl.