MC Learn Fundamental Investing | Sectors, cyclical stocks and defensive stocks

Stocks are categorised into sectors in order to make them easy to compare the businesses or companies
that have a similar business model.

MONEYCONTROL NEWS

JULY 14, 2022 / 09:07 PM IST

Module 1: Chapter 7

A stock market is divided into different sectors. Each sector constitutes a group of stocks that have a lot
in common, mainly because they are from a similar industry. There are a total of 11 sectors in the stock
market, according to the Global Industry Classification Standard (GICS). In this chapter, we will discuss
these sectors in brief.

Sectors of Stock Market

Stocks are categorised into sectors in order to make them easy to compare the businesses or companies
that have a similar business model. At the time of investing, you can select the stocks within these
sectors that suit your goals the most. Further, sectors also make it easy to compare the available stocks
in order to find the most profitable ones.

1. Energy Sector

This sector includes the companies that operate in the natural gas and oil industry. It covers oil and gas
production and exploration companies, as well as the producers of fuels like ethanol and coal. Further,
this sector also includes the businesses that supply equipment, services, and materials to oil and gas
manufacturers.

2. Materials Sector

The material sector covers the companies that supply a range of goods for manufacturing and other
operations. Within this sector, you can find producers of construction materials, chemicals, packaging
and containers, etc.

3. Industrials Sector

This sector includes a wide range of businesses and companies that involve the use of heavy machinery
and equipment. You can find airlines, logistics, and airline companies in this sector along with the
defence, aerospace, engineering and construction industries.

4. Utilities Sector

The utility sector covers all types of utility companies. In this sector, you will find utilities like electrical
power for residential and commercial purposes, natural gas distribution, water distribution, renewable
electricity etc.

5. Healthcare Sector
The Healthcare sector is further divided into two categories, one covers companies that develop
treatments and pharmaceuticals based on biotechnology along with the supplies and tools required for
the clinical trials to test those treatments. The other sub-sector includes healthcare services and
equipment, for example, health insurance, surgical equipment supply, etc.

6. Financials Sector

This sector encompasses companies that work towards handling money. Banks, brokerage firms,
insurance companies, finance providers etc. fall into this sector.

7. Consumer Discretionary Sector

This sector includes the goods and services for which customers demand according to their financial
sector. For instance, if you earn $25,000 per year, then you'd buy a different car than the one who earns
$25 million per year. This sector of the stock market includes all the businesses and companies that sell
luxury items and leisure products. Both eCommerce companies as well as brick and mortar companies
can be seen in this category.

8. Consumer Staples Sector

The consumer staples sector encompasses all the goods and services needed by the customers
regardless of their financial status. This includes companies operating in food, beverage, personal care,
and other household items. The companies that are selling stapes are also included in this sector, for
example, supermarkets.

9. Information Technology Sector

The IT sector covers companies involved in technological innovation. Some companies in this sector
focus on providing technological solutions and creating software, while others are involved in the
manufacturing of equipment, hardware and components.

10. Communication Services Sector

This sector was added recently by GICS. It includes some areas that were earlier used to be a part of
other sectors. Telecommunication services, including both wireless and landline service providers, come
into this sector. Further, media and entertainment companies are also included in this sector.

11. Real Estate Sector

This sector covers two types of investment groups. Some stocks in this sector involve the development
of new real estate projects and then managing them by having tenants for the space within the
property. Apart from these, various real estate investment trusts also come under this sector.

Cyclical Vs Defensive Stocks

The biggest advantage of sector investing is that it allows you to invest in the stocks according to the
economy. Note that the stocks within a market are classified as cyclical, defensive and industrial stocks.
Let's see what this classification means:
Cyclical Stocks

As the name suggests, these stocks are likely to be influenced by unpredictable price fluctuations. In
short, these stocks are dependent on the economy of a country. These stocks refer to the companies
that experience higher profits when the economy is booming. Tata Motors is a good example of this
category of stocks. For those who don't know, the company sells vehicles. So, when the economy is
growing, people earn more and are more likely to purchase cars and vehicles. In this way, sales and
profits of Tata Motors increase.

The drawback is, that when the economy declines, the profit and performance of these stocks also
decline.

Defensive Stocks

These stocks are generally less likely to be influenced by the change in the economy. They are also
known as non-cyclic stocks because their prices remain constant during all the phases of an economic
cycle. Examples of these stocks include essential and non-durable items (like toothpaste, soap,
detergent, etc.) that people will continue to use and buy regardless of the economic situation. Utilities
such as gas, water, and electricity also come in this category.

Investing based on a sectoral approach

Sector investing is quite popular among investors. Any investor can plan to invest in the sector he/she is
interested in. Also, if you like a particular sector but don't want to invest in a particular company, then
you can also take part in sector investing. You can seek investments like mutual funds and ETFs that are
low in risk and are tied to particular sectors.