How a Sector Can Play in Your Favor
If you’re interested in the stock market, understanding how investment sectors work — and which are more desirable — can play to your favor. After all, you want to know how and when you can potentially make the most money.
Certain investment sectors fall in and out of favor all the time. For instance, during the 2008 financial crisis, many real estate stocks took headers. The same thing goes for auto companies that had to be bailed out.
Real estate and automotive are just two investment sectors out of many. Here, I’ll share with you my opinions on these sectors and which of the stock market sectors are hottest right now.
What Are Investment Sectors?
A sector, in some ways, is just another way of saying “industries.” In the finance industry, however, investment sectors refer to the specific delineations between different types of stocks and securities. Healthcare, energy, pharmaceuticals, and tech are just a few examples of investment sectors.
The reason we divide investments into sectors is that each has a different risk profile associated with it.
Some stocks are inherently more risky than others. Plus, many analysts like to specialize. Someone who’s an expert on energy stocks might provide commentary and advice exclusively on energy securities.
Additionally, stocks don’t exist in a vacuum. They’re part of a larger market. That’s why analysts and other professionals in the securities industry evaluate sectors as well as individual stocks. For example: Instead of saying GM’s stock increased by X percent, we could say that the automobile sector increased by X percent.
What is a Sector Fund?
A sector fund is a mutual fund or other type of fund that pools securities from only on sector. If you believe that an entire sector will rise in value over time, you might invest in a mutual fund or exchange-traded fund (ETF) devoted to that industry.
In many cases, sector funds are considered less risky because you’re not relying on one company to fuel the investment. Even if one stock goes down in price, its compatriots can make up for those losses and mitigate your risk of losing money.
Of course, it doesn’t always work out that way. There aren’t any guarantees. Retail might be really hot one month, then swing low the next, which could affect an entire sector fund.
The Influence of Tax Reform on Investment Sectors
The recent tax reforms, put into place by President Trump, could result in an upswing in the stock market. The tax cuts resulted in record highs in the stock market, which could prove valuable for investors moving forward.
Changing the sectoral balance, however, could have unpredictable impacts on the stock market and other securities, so it’s important not to rely exclusively on this development.
Examples of High-Level Investment Sectors
Individual sectors, such as utilities and telecommunications, are divided into four primary economic sectors. Each sector represents part of the economy.
Technically, there are actually five economic sectors — the last one reserved for government and industry decision-makers — but the top four are the ones that will probably concern you.
The first or primary investment sector focuses on commodities — not the market, but the products.
Companies related to mining, agriculture, and similar endeavors fall into this category. It’s often called the raw materials sector because it relates to natural products.
Animal husbandry also belongs to the primary sector, as do forestry and crop management.
If you can grow, raise, or harvest the product, the company behind it belongs in this investment sector.
The secondary sector deals with manufacturing and other aspects of industry. It’s considered secondary because it often uses materials produced in the primary sector to create a finished product.
For instance, a logging company would belong in the primary sector. The furniture company that uses that wood to make tables and chairs would fall into the secondary sector.
Other industries that belong in this sector include construction products and processes, supply chain companies, and the warehousing industry.
Companies and industries in the tertiary sector provide services. These are the businesses that clean carpets, manage your marketing endeavors, provide consulting, and more.
The secondary sector supports this sector by providing the finished products with which these companies provide their services.
Labor is just one facet of the tertiary sector. Also included are companies and industries that provide advice, experience, and guidance. Additionally, services like transportation and hospitality fall under this umbrella.
Our final sector, the quaternary sector, is all about information services. This is the innovative sector.
Companies that operate here have a significant level of education and experience behind them, and they’re generally tasked with making new advancements to help a culture grow.
Scientists, information technology companies, and educational companies all belong here. They’re tasked with sharing information or using it to create more opportunities for industry.
I have some examples of some depressed market sectors to go over with you tomorrow.
Hang tight — there’s more to come!
— Tim Sykes
Editor, Penny Stock Millionaires