The 11 Big Players in the Stock Market You Need to Know
Dear Penny Stock Millionaire,
When you think of day trading, “stock sectors” aren’t exactly the first thing to come to mind, right?
But if your goal is to be a killer trader, then you must understand the different stock sectors and why they matter. It’s important and you need to know it.
Yesterday, I told you about the advantages of trading tech stocks and how to look at the tech sector. But just trading tech stocks isn’t enough for you to be a well rounded trader. I want to make sure you are ready to trade any sort of stock. No matter what sector it is in.
I’ll go over exactly what the 11 different stock sectors are and why they are important.
What Is a Stock Sector?
There are thousands of companies in the stock market.
Each stock is placed in a “sector.” This means that each stock you invest in fits into a specified sector. These sectors are generally representative of the overall sectors of the economy.
(If the word sector doesn’t appeal to you, you can just think of them as “categories.”)
Understanding the sectors and why they’re important for stock trading can potentially give you an edge in the market.
So let’s look at all the sectors now…
The Different Stock Sectors
According to Global Industry Classification Standard, there are 11 different stock sectors. Here’s a look at each sector, along with some of the largest and well-known companies in each.
The energy sector contains oil, gas, coal, and fuel companies, as well as energy equipment and services. You can think of the equipment side of the coin as the companies that build oil-drilling equipment, and the service side as different companies that oil companies hire.
Your major players in this sector are Exxon, Shell, Chevron, BP, Kinder Morgan, Schlumberger, and Halliburton. These companies generate billions of dollars in profit every quarter and have generous dividends.
This sector is strongly correlated with the price of crude oil. If the price of crude oil is falling, you can bet that the companies in this sector are falling as well. However, the stock prices of these companies are relatively stable, and the generous dividends can make them a good long-term hold. They can also be a good choice if you’re looking to get defensive in a rough market.
The basic materials sector are chemical, construction materials, packaging, metals, and paper companies.
These companies are usually operating in the business-to-business space, meaning that they sell their products to other companies. They provide the key supplies that are put into the products that you and I purchase.
You can think of these companies as being at the beginning of the supply chain. They provide the steel for cars, the wood for homes, the plastics for packaging, and much more.
The most well-known companies in the materials sector are DowDuPont, Ecolab, Valvoline, Scotts Miracle-Gro, and Sherwin-Williams.
Next up is the industrials sector. The defense, machinery, aerospace, airlines, construction, and manufacturing companies are in this sector.
There are a lot of large-cap companies in this sector. They include Boeing, 3M, Honeywell, UPS, Delta, Lockheed Martin, Deere, Caterpillar, and many more.
Much like the oil companies, industrials generate lots of cash flow and have stable dividends. If the defense budgets for countries 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. These are companies where you and I spend a lot of our money. It’s where our discretionary income goes. It’s the retailers, apparel, restaurants, autos, hotels, media, and household products.
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.
Along with discretionary, there’s also consumer staples. These are the food, beverage, and tobacco companies. They’re also manufacturers of household goods and personal products, as well as 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 and Gamble, Costco, Kraft Heinz, Estée Lauder, and many more.
This is considered a defensive sector because these companies are generally resilient in the event of an economic downturn.
The difference between consumer staples and consumer discretionary is that the staples are companies that produce products that people buy on a regular basis. They also include supermarkets like Walmart. Discretionary 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 it from supermarkets.
Companies in the healthcare sector are the pharmaceuticals, healthcare equipment, and healthcare services.
Johnson and Johnson, Pfizer, Merck, Medtronic, and UnitedHealth are some of the bigger companies in this sector.
The companies in this sector are often good plays and safe bets because people will always need medical care, whether it’s from pharmaceutical drugs or hospital visits.
The financial sector consists of banks, insurance, and real estate companies.
This sector is closely tied with interest rates. If interest rates increase, then big banks make billions of dollars more. This is 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. Bank, 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 is one of the leading sectors of the last few years. This means that if the bull market continues to run, we’ll need strong earnings from companies in the tech sector.
We covered this sector in depth yesterday. So I recommend reading that issue if you want more information.
This sector is companies in the communication services. 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 they operate, and local governments regulate most of their prices.
Since these companies operate in regional areas (i.e. there isn’t one national electric or water provider in the United States) you would 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. Like most sectors, they’re subject to heavy government regulation, but they’re safe bets in a shaky market environment.
This last one is pretty self-explanatory. It’s real estate companies called REITs (real estate investment trust) and real estate developers.
They operate apartments, malls, offices, and senior living communities. If your grandma is 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 increasing property values. And since they pay out at least 90% of their taxable profit as a dividend to shareholders, they’re usually great for a long-term hold, with dividend checks coming 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.
The Bottom Line
Got all that?
When you invest, doing analysis is an essential step before you buy in. If you’re looking to invest in a stock, but you don’t know what’s going on in the sector that stock is in, you’re walking in half blind.
It’s not the sexy part of investing but doing your research is one of the single most important steps.
Make sure you are checking all the boxes when you invest. Don’t gamble and cut corners. You’ll eventually get burned and end up regretting it.
Tomorrow, I’ll go over how to access various sectors, and the importance of diversifying your portfolio across sectors. Stay tuned.
Editor, Penny Stock Millionaires