A sector is a group of stocks in similar businesses often traded by sector funds. Examples include airlines, railroads, energy, oil, automobiles, chemicals, pharmaceuticals, homebuilders, auto parts, agriculture, minerals, mining, light metals, steel, gold, precious metals.
Grouping stocks into sectors lets investors see how well the companies they own are doing relative to others in the same industry. Companies in the health-care sector, for instance, will all be affected by the same factors: an aging population or change in insurance laws, for example. A glut of steel, for example, would present challenges to all of the competing companies in the sector. If your stock is out of sync with the rest of the sector, it pays to know why. It also pays to know if your stock is getting pulled along by investor sentiment about the sector without regard to its fundamentals.
Within a broad framework built by logic, different groups craft different market sectors and subsectors to analyze. Sectors can be deemed 'cyclical' or 'defensive,' which refers to how the stocks within the sector react to market forces. Utilities, for example, could be considered a defensive sector because energy needs remain stable whether the economy is doing well or badly. And utilities are often monopolies, which protects them from market forces. The automotive industry could be considered cyclical because people's propensity to buy cars fluctuates with their feelings of wealth.
Of course, opinions differ on how to define sectors and on which are cyclical and which are defensive.
The "Global Industry Classification Standard (GICS)" -- developed by MSCI and Standard & Poor’s (S&P) -- provides one sector structure, with 10 sectors, 24 industry groups, 68 industries, and 154 sub-industries, according to the standard's website in October 2008. The "Industry Classification Benchmark" (ICB) from Dow Jones Indexes and FTSE contains more than 60,000 companies and 65,000 securities from around the world, according to the ICB website in October 2008.
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