What is “Market Sectors”?

Most analysts and reporting mechanisms divide the companies in an economy into 11 different market sectors. A market sector is a part of the economy in which the businesses broadly share the same or a related product or service. It could also be thought of as a group of companies that share common operating characteristics.

Dividing an economy into different market sectors enables a more in-depth analysis of the markets, sectors, and companies as a whole. Having stated this, it’s important to note that sectors are broader than industry classifications. A sector can be made up of many industries.

The market generally classifies companies in various ways, and groups similar companies together for comparison purposes. Most analysts and financial media term these groupings as sectors. We often read about the financial performance of specific sectors in the media.

Key Learning Points

  • Companies are divided into 11 different market sectors
  • Each sector includes those companies that broadly share the same or a related product or service, and share common characteristics

Market Sectors – Types

Each sector has its own benefits and characteristics, risk profile, and other considerations, and may require different valuation considerations. Stated below are the eleven sectors:

Communications: companies in this sector facilitate communication or provide entertainment content and other information through various types of media. This sector can give an investor exposure to several different investing themes, such as increasing demand for broadband and faster internet connections to stream various media or content.

Consumer Discretionary: companies in this sector manufacture or provide goods and services that people may want but don’t necessarily need – for example, high-definition televisions, new cars, and family vacations. Companies in this sector tend to see their performance closely related to the health of the overall economy as increases (decreases) in wealth can prompt additional (no) spending on these items.

Consumer Staples: companies in this sector provide goods and services that consumers use on a daily basis, such as food, clothing, or personal products. These companies are less sensitive to the overall economy, as people consume the above regardless of the state of the economy.

Energy: this includes exploration, production, transportation, or management of energy resources such as oil and gas, as well as companies that service these industries.

Health Care: companies in this sector are involved in the production and delivery of medicine and healthcare-related goods and services.

Financials: companies in this sector are involved in banking and brokerage, mortgage finance, and insurance.

Industrials: companies in this sector manufacture and distribute capital goods in support of industries such as aerospace and defense, construction and engineering, electrical equipment, and heavy machinery.

Technology: companies in this sector manufacture goods and provide services, including hardware, software, semiconductors, and consulting services. It tends to be the most volatile sector in terms of market performance and the largest in terms of market capitalization.

Materials: companies in this sector are involved in the manufacturing or processing of chemicals and plastics, or they may harvest trees, or extract metals and minerals. Companies in this sector tend to be sensitive to both the economy and the price of underlying commodities that are input in their processes.

Real Estate: companies in this sector own commercial and real estate properties. A large portion of the companies is structured as Real Estate Investment Trusts (REITs).

Utilities: companies in this sector are involved in the production and delivery of electric power, natural gas, water, and other utility services. This sector tends to be the least volatile among the 11 sectors and tends to pay relatively high dividend yields.