The stock markets continue to captivate investors all around the world. Due to the vast number of investment options and access to easy liquidity, it remains one of the best bets for people looking to generate long-term wealth.
There are a plethora of companies listed on the stock market. These companies work and belong to different market segments and the stock market is divided into 11 major sectors. Each of these sectors represents a key area of the economy.
The sectorial distribution of companies makes the stock market systematic. It enables investors to create a diversified portfolio which is necessary as it helps to minimize losses and lower risks.
So. let's take a look at each of these sectors.
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Consumer Staples
The consumer staples sector includes essential goods without which it is difficult to survive and companies retailing these ‘necessities of the life’ products come under this segment. These goods are non-cyclical i.e. they are always in demand.
This sector can be broken down into six industries:
- Beverages
- Food and staples retailing
- Food products
- Household products
- Personal products
- Tobacco
According to Investopedia, there is no substitute for consumer staples goods and consumers have a lot of options to choose from while shopping which makes the competition between the companies challenging.
Investing in consumer staples makes sense as this sector tends to outperform the broader markets in a recession because people are more focused on buying necessities rather than luxuries and sometimes demand even increases during this period. Consumer staples companies also lure investors by offering attractive dividend yields.
Canadian companies such as Loblaw (TSX:L), Metro (TSX:MRU), and George Weston (TSX:WN) are some of the prominent stocks in this space.
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Energy
Companies that are involved with the production, storage, and transportation of oil, coal, and gas are represented here. Oil and gas exploration companies as well as producers of ethanol are a part of the sector.
It also includes companies that build energy equipment, provide energy services, and are involved in its production process.
According to Investorjunkie, the energy sector tends to perform well when the economy is in recovery as economic growth requires energy. Since the regions where energy is produced in the world are highly unstable, a reduction in international supply is not uncommon. This shortage can increase the demand and in turn, boost the stock price of companies.
Top Canadian energy stocks include Enbridge (TSX:ENB)(NYSE:ENB), Suncor (TSX:SU)(NYSE:SU), and Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ).
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Financials
This sector consists of banks, insurance companies, investment brokerages, or businesses that are primarily related to handling money. These companies generate revenue through loans and mortgages that gain value as interest rates rise. A strong financial sector is a sign of a healthy economy.
The financial sector thrives in a rising economy but should be avoided during a recession due to lower interest rates and the chance for higher defaults. Canada’s largest banks including the Royal Bank of Canada (TSX:RY)(NYSE:RY) and Toronto-Dominion (TSX:TD)(NYSE:TD) belong to the financial sector.
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Healthcare
According to InvestmentU, healthcare is a popular stock market sector and it can be a home to great success given the constant need for innovation. It comprises pharmaceutical companies and health care equipment and services.
The sector performs well irrespective of the economy because of the demand for healthcare. Generally, companies belonging to this sector display strong balance sheets and also offer good dividends to investors.
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Industrials
This is a very broad sector that includes companies that produce capital goods and involves the use of heavy equipment. Companies involved with aerospace and defense, industrial machinery, tools, construction, waste management, cement, etc. are all a part of the industrial sector.
Industrials are a cyclical sector which means that there is a boost when the economy is rising and the demand is low in a downturn. The majority of industrial companies provide high dividends to investors.
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Communication Services
Previously known as the telecom sector, this sector includes providers of new-age communication service industries such as wireless telecom networks and traditional landline connections. Media and entertainment companies also belong to this sector.
The communication services sector is fairly recession-proof as people will keep consuming content and pay their telephone bills irrespective of the state of the economy.
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Information Technology
This is the sector that has been growing tremendously in the past few decades. Companies involved in technological innovation are a part of this sector that includes firms in the internet, computer software, hardware, and semiconductor verticals.
The tech space has helped investors generate massive wealth in the last two decades. Now, Canada’s largest company in terms of market cap is tech giant Shopify (NYSE:SHOP)(NYSE:SHOP), a stock that returned over 6,000% since its IPO in May 2015.
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Materials
Companies in the Materials sector process and supply raw materials and natural resources. The manufacturing or mining of materials include:
- Chemicals and plastics
- Construction materials
- Paper, forest products, and packaging products
- Metals and minerals
The materials sector benefits from inflation because even when the price increases, the cost of extraction remains the same. The sector is also fiercely competitive which may result in slow growth.
Another structural issue impacting this sector is that product demand depends on the economy. If the economy weakens, the demand, as well as the pricing of the product, goes down. Today, the shortage of mineral resources can be a major concern for companies in the material sector.
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Real Estate
The sector includes companies that own, develop, lease, and manage land and property. They generate revenue from rents and increasing property value.
As expected, the Real Estate sector performs well in a growing economy, or when the economy is recovering from a recession as the demand for real estate properties and housing increases. REITs or real estate investment trusts are another way you can invest in this sector.
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Utilities
The companies that are engaged in the production and delivery of natural gas, water, electricity, and other essential services such as steam or cooled air are categorized as utilities.
According to TheMotleyFool, the steady demand for these services has helped them in generating a stable income as well as recurring cash flows which enable them to pay dividends with above-average yields.
The steady income and predictable profit generation make the sector a low-risk investment option across business cycles.
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Consumer Discretionary
Consumer Discretionary is synonymous with luxury and includes industries like automobiles, restaurants, travel, hotels, retail, apparel, etc. These are the products that we buy when we have extra money.
Consumers spend on luxurious products when the economy is flourishing and so the demand for these products is high during this period. This sector is also sometimes referred to as “consumer cyclical”.
The sector is a good investment in a stable or growing economy but it is best to avoid during a recession period.
The Bullish takeaway
We can see that each industry is unique in its own way and provides a variety of investment options. For investors with a high-risk appetite, the possibility of generating market-thumping returns by identifying growth stocks in the tech space might be a suitable option.
For the risk-averse investor nearing retirement, investing in recession-proof companies in the utility or consumer staples sectors might be a sound investing decision.
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