Just like the houses in your city are placed under different sectors, the publicly traded companies are also put under different sectors depending on the niche they fall under. Wondering what are these stock market sectors and how many of these sectors exist?
To get an idea of the sectors in the stock market and its need, let’s consider an example.
Mithun lives in a flat in a particular society and he wants others to identify his house and navigate it very comfortably. Now, there must be several hundred similar flats in that society. How would Mithun differentiate his flat from the rest of the other flats?
To solve this problem, the whole society is divided into different blocks based on the size of the flats. Now he can just tell his flat and the block number to anyone and people would have no problem finding his house.
Similarly, in the stock market, the major challenge that comes across traders and investors is how to invest in share market and moreover how to pick stocks for investment.
As there are thousands of companies that are being traded publicly on a regular basis. Identifying what company serves what purpose among so many companies is a demanding task which is why these companies have been divided into different sectors depending on the area of the economy they belong to.
Investors can now simply select their sector of interest and find the list of companies that belong to the sectors.
Types of Sectors in Stock Market
As per the Global Industry Classification Standard (GICS), there is a total of 11 major sectors in the Indian stock market. We will be discussing each of these sectors in detail. These sectors are broadly classified under 4 major groups or sectors:
- Defensive Sectors
- Evergreen Sectors
- Cyclical Sectors
- Sensitive Sectors
Depending upon the effect of the economy, interest rates, business cycles, etc, these sectors are further sub-divided into 11 major classes. Gaining proper knowledge and understanding helps you to learn share market.
1. Defensive Sectors
Often, investors tend to confuse defensive sectors with defence sectors which involves companies that build weapons and arms to aid the defence. Defensive sectors are completely different and they are called so because they are deemed to be reliable.
The stocks under defensive sectors yield a stable income regardless of the market conditions because the demand for these stocks never changes. Investors often turn to this sector during the weak phase of the market to ensure some return.
Even though the defensive sector ensures a stable earning even during a weak phase of the market, it doesn’t give bigger returns like the other sectors during a bull market because of the low volatility. This sector basically operates on the low-risk, low-reward model.
These are the following sectors that fall under the umbrella of the defensive sector.
- Utilities Sector
Water, gas and electric utilities come in the defensive sector because their demand is always constant since people need them all the time. These are the basic requirements and humans can’t survive without these things which is why regardless of the market conditions, they give constant returns on investments.
- Healthcare Sector
Stocks of the companies dedicated to making medicines or any other medical pieces of equipment, hospitals, and pharmaceutical companies are considered defensive stocks because again, people are going to need them all the time regardless of how the market behaves since they will keep falling sick because of one reason or the other.
- Consumer Sector
In this list of the stock market sectors, the third stock market sector that falls under the defensive sector is consumer staples. This includes everyday products such as food, beverages, and personal and household products. The demand for these items is never going to reduce as they also fall under basic requirements for survival.
2. Evergreen Sector
The evergreen sector is a term that is used to refer to the kind of stock market sectors people believe will continue to grow in the long term. The products in this particular sector are categorized by their potential and people’s demand for them in the long run.
For example, consider yourself a 10 years old kid who loves helicopter toys. Now fast forward to 15 years when you turn 25. Will you love those helicopter toys the same way you loved them when you were 10 years old? Probably not!
This means helicopter toys for you can’t be placed under the evergreen sector as their importance in your personal life will reduce after a point. Similarly, the products in this sector have to be of great use even in the future and the investors can reap rewards from these investments even after 10-20 years or an even longer period.
These are the following few sectors that are placed under the evergreen sector.
- Information Technology Sector
With the advancement in technology, particularly the internet, the information technology (IT) industry has grown at the swiftest rate and it is not supposed to stop either since everything, from basic payments to buying your favorite snack to something as complex as currency, everything is going digital these days.
The outburst and spread of the COVID-19 pandemic have only helped in its growth since people can now access every kind of information from the comfort of their homes. The IT sector is only expected to go up as the demand for online data remains constant or goes only up even after so many years in the future.
- Infrastructure Sector
In a developing country like India, the demand for developing the infrastructure is continuous. When you go to a developed country like USA or UK, infrastructure is a finished product and they don’t have to focus on it a lot but in the developing countries, it is a constant work in progress.
Under this sector, the government focuses on building highways, developing railways and airports as well as renewable energy, and in a country as huge as India, this sector is only going to grow in the upcoming years making it an evergreen sector.
- FMCG Sectors
Under the Fast-moving consumer goods sector, companies that are responsible for producing and delivering products needed on a daily basis such as packaged food, household products, cosmetics, or toiletries are placed and it is highly unlikely that you won’t need these products in the next 20 years.
3. Cyclical Sector
As the name, cyclical sectors follow a cycle of market highs and lows and thus, completely depend on the market’s volatility. These sectors are completely opposite of the defensive sector and thus bring more risk and reward with them.
Cyclical sectors are impacted by even the smallest changes in the stock market and hence, investors need to have a lot of knowledge before investing in these sectors. There are only two out of the 11 stock market sectors that fall under this sector.
- Consumer Discretionary Sectors
Opposite of consumer staples, consumer discretionary focuses on providing the consumers with luxurious products that are not required for basic living. These products can involve car manufacturing, airlines, restaurants, and other luxurious things.
The companies involved in this sector make loads of profit when the market is up since the consumers like to buy luxurious items or travel to different places in a stable or bullish market but as soon as the market goes down, these discretionary expenses are the first thing that is impacted as people like to save for their urgent needs by cutting down these extra costs.
Therefore, as an investor, you can only make profits by investing in a cyclical sector during a bullish market.
- Media and Entertainment Sector
The media and entertainment sector includes those stocks of the companies that provide information and entertainment to the common public. This has been placed under the cyclical sector because they are not urgently required for living and people only these products when they wish to.
The value of these stocks fluctuates with the market conditions as people cut down the leisure hours that they normally spend consuming entertainment content during a phase of turmoil in the market.
4. Sensitive Sector
Sensitive sectors are the sectors that are highly sensitive to the changing interest rates. They fall somewhere in the middle of the defensive sectors and the cyclical sector as they are impacted not by the changes in the market but by interest rates.
Businesses that run on leverages or the companies that pay high dividends are some of the prime examples of sensitive sectors. Since these companies function on borrowed capital, the rate of interest plays a key role in their functioning.
There are three stock market sectors that are given the status of the sensitive sector. The risk level in these sectors is of moderate level.
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Automobile Sector
The automobile sector is one prime example of a sensitive stock market sector since they are purchased with borrowed capital with an aim of making profits. Now the investors have to pay interest on that borrowed money which is why any fluctuation in the rate of interest impacts the mood of investors directly.
- Communication Sector
Under the communication sector, companies provide phone calls, messaging, and internet services. Since the working model of this sector involves paying high dividends, they often depend largely on the rate of interest.
For example, when the rate of interest rises, the investors become hesitant to put their money in this sector since they feel the risk and reward don’t match each other and they can earn better rewards in the other sectors with less amount of risk.
- Financial Sector
We already know what a Financials sector is in the stock market and Since the financials sector also depends largely on the rate of interest in the market, they are also placed under the sensitive sectors.
The financials sector includes banking, housing finance, insurance companies, and any other institute that is responsible for handling or storing your money. Housing finance, in particular, has been growing at a rapid rate and outperforming the other financial sectors quite comfortably.
The financials sector has been put under the evergreen stock market sector because of the fact that people perceive these financial products, especially the NBFCs (including housing finance), as the trend suggests as a great long-term investment option, a few years down the line in the future.
Conclusion
Just like how Mithun’s decision to divide all the houses in Delhi into different sectors made navigating to his house a lot easier, categorizing all the companies listed on the stock market exchanges into different sectors also gives them an identity and makes it easier for the investors to find them.
Imagine you are an investor who wants to invest in an evergreen sector to secure your money for the future. Now instead of doing the hard yards of looking at different companies, all you will need to do is to find a company that fits under either the IT, infrastructure, Fast-moving capital goods or financial sectors.
Similarly, if you want to make the most out of the bullish market, you will turn towards the cyclical sectors and find a company that fits under its definition to invest in. The categorization of the stock market into 11 sectors has been done only to serve this purpose.
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