Stock trading can be advantageous for many traders, and offers plenty of opportunities to profit from the financial movements in the market. One of the steps towards becoming a successful stock trader is to have a well-diversified portfolio, which means investing in stocks across the different sectors.
These sectors are the different elements of the economy in which the stock market can be divided into. It gives the market structure, and places together the stocks in the same industry that are likely to move in the same way. There are eleven recognised stock sectors in the industry classification system, which was originally set out by the Global Industry Classification Standard (GICS) in 1999.
Diversifying your investments across the different stock sectors, will help limit the amount of risk you could encounter, as a fundamental factor that could affect one sector may not impact the other. By investing in different stock sectors, you can mitigate the factors that would affect specific industries or companies.
As the old saying goes, you should never put all your eggs in one basket, and so one of the ways to trade stocks successfully, is to spread your capital, so you have access to the different areas, and not concentrate all your funds in one sector.
So, if you’re wondering how to trade stocks online successfully and take advantage of the different stock industries and their price fluctuations, here’s a guide to the most popular stock sectors.
Technology
The technology stock sector includes the companies that focus on creating software, hardware, or other innovations, such as the manufacturing of technological equipment, components or semiconductor chips. It also includes the companies that provide technological related services. This sector is made up of companies that are up-and-coming and fast growing, as developments in technology are continuously developing. Therefore, tech stocks can be extremely volatile.
The most popular companies in this sector are Apple (AAPL) and Microsoft (MSFT), who remain at the top of the largest US stocks in the tech sector, with Facebook (FB) closely following behind.
Financial
As the name suggests, the financial sector of the stock market is primarily represented by businesses that handle money and finances. This means it includes a wide range of companies such as insurance brokers, payment processing companies, consumer finance providers and mortgage lenders, with the main businesses within the sector being banks.
Understandably, the financial sector is closely linked to the economy, both domestically and globally, and so any instability or reaction to economical events, can affect their price. However, financial stocks tend to be less fluctuating, in general, and so are seen to be a solid investment within a long-term trading strategy.
Some of the top stocks in this sector are insurance company, Berkshire Hathaway (BRK-A) and JPMorgan Chase (JPM), which is the largest US bank.
Energy
Alongside the commodity market, as a stock trader you can also buy and sell shares in companies associated with the energy sector. This includes the companies that are involved in the exploration, extraction or production of consumable commodities, such as crude oil, natural gas, electricity, coal or ethanol. This does not include renewable energy companies, which are classed as part of the utilities industry.
Buying energy stocks is seen as a stable investment the majority of the time, as the sector is made up of mainly big oil companies, and the value of their stock coincides with the price of crude oil. However, when it does experience market movement, the stock prices are affected by extreme volatility, due to the influence of geo-political events that impact both the commodities and stock market.
As aforementioned, the sector is dominated by large oil companies, and so the top energy stocks are Royal Dutch Shell (RDSA) and BP PLC (BP).