Broaden Your Investment Horizons with This Special Fund
Dear Penny Stock Millionaire,
The 11 sectors that stocks are separated into are crucial for any serious trader to know. If you are buying stocks without researching the sector they are in, you’re playing with fire.
But even once you know the sectors and how they are influenced, how do you take advantage of it?
For instance, if you think that the price of crude oil is going to go up, causing the entire energy sector to see a boost. But you don’t know what specific company will benefit, how do you use that knowledge to make a profit?
The answer is EFTs.
You can trade each individual sector by trading an exchange-traded fund (ETF).
Think of ETFs as being a group of stocks all placed into one fund. And you can buy that fund which has that group of stocks. These ETFs are less volatile, which can make them great for beginner traders that can become scared off by rapid (and sometimes extreme) price movements.
There’s a group of ETFs called the SPDR. A company called State Street Global Advisors manages these ETFs. 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 and trade these ETFs. Since an outside company manages these ETFs, they have fees with them in the form of an expense ratio. This charges shareholders a percentage (usually less than 1%) of the funds total assets. That money goes toward administrative, management, advertising, and some other expenses.
In addition to ETFs, 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 United States stock market. This similarity gives investors the opportunity to compare stock sectors across countries.
Being able to compare sectors across the various foreign markets, can give you a huge advantage. If you see that there is a spike in foreign markets in a particular sector, you can tap into that when the US market opens. Since they are all in different time zones, watching foreign markets can give you an idea of how the US markets will react when they open.
You can check how the sectors in other countries are performing by going to Bloomberg and clicking on each continent to see how the sectors are performing in that region.
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.
Because stocks in the same sector tend to move together. So, if some energy stocks are down, chances are other ones will be as well. You need to diversify your investments and make sure you’re spread into different sectors. Doing so will increase your exposure to more defensive sectors and protect your investment.
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 late 2017 you decided to invest in five stocks and hold them for the duration of 2018. And for all five stocks you chose bank stocks because you hypothesized that they would have a good year.
Unfortunately, that strategy would have turned out to perform very poorly. Financials were one of the worst-performing sectors in 2018. Instead, if you picked stocks that are in different sectors (i.e. diversifying your investments) then you would have fared better.
You could have invested in a real estate stock, a tech stock, an energy stock, and a consumer discretionary stock in addition to your financial stock.
This would have created a more balanced portfolio with exposure to different areas of the market.
And assuming in our example, the stocks you selected in the other sectors performed like the market average in 2018, you would have come out better than had you gone all in with the financial sector. Each of those other sectors in this example performed better than the financial sector in 2018.
Don’t put all your eggs in one basket!
Prepare Yourself to Invest in Different Stock Sectors
Before you start diving in and picking your favorite sectors to invest in, you first need to gain an understanding of each sector.
To do that, you can first take a bird’s-eye view with the yearly performance of each sector, and then narrow to the monthly performance, and then daily performance. You can check the daily S&P performance of different stock sectors on CNBC.
If you’re looking for a longer-term investment, you’ll want to keep an eye on how the sector has performed over the last year. For instance, the financial stocks haven’t performed very well the last year. So if you were looking for a long-term hold, why would you add a financial ETF or a bank stock?
Granted, past performance isn’t indicative of future results, but — 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 just looking to day trade or swing trade, then 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 one strong day, that doesn’t guarantee it will last any further than that day. For example, if the price of crude oil increases, then a stock like Exxon (XOM) will increase as well. But crude is subject to many catalysts, which means that it can swing and decline quickly, and Exxon’s stock will too.
Just like any good trader, be sure to time your entries and exits well, and cut losses quickly.
The Bottom Line
Stock sectors might not be the most exciting facet of your trading education, but it’s crucially important if you want to be a part of this world.
If you plan to put your hard-earned money into a stock, then you 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, my friend, is 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.
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.
Editor, Penny Stock Millionaires