What are stock sectors?

Investing in the stock market goes far beyond selecting a profitable company. The key to portfolio diversification is understanding how the stock market is organised so you can allocate your funds accordingly.

To help make that easier, the stock market is split into different groups that reflect their industries, such as energy or information technology stocks.

Read on to learn about stock sectors that are popular both in Australia and around the world.

What are stock sectors?

Stock sectors are just different categories of companies. They can be labelled and categorised in a number of different ways, but one of the most popular methods is GICS.

In the Global Industry Classification Standard (GICS), there are 11 economic stock sectors, that are further subdivided into 24 industry groups, 68 industries and 157 subindustries.

The GICS was developed by Morgan Stanley Capital International (MSCI) and Standard & Poors (S&P) in 1999 to help global companies and investors compare and sort stocks. The system is used by MSCI indexes and has been modified many times since its inception to account for major shifts in the global economy.

Our expert says: Mind the small print

"Understanding stock sectors is the first step toward making sure your portfolio is diversified. Instead of putting all your eggs in one basket, spreading your investments across different industries can help balance out risk when markets shift. For example, defensive sectors like consumer staples or healthcare tend to be more resilient during downturns, while technology and energy can offer higher growth potential during stronger economic cycles. "

Kylie Purcell

Investments Analyst

Energy

Companies that make a profit from oil, natural gas and coal fit into the energy sector. This includes companies that help locate, mine, produce, refine or market fuel. The profitability of this stock sector relies on the price of crude oil but stock prices tend to be stable and often pay large dividends.

The big names in this sector include:

Materials

Companies that process raw materials fit into the materials sector. These companies typically sell to other businesses at the head of the supply chain. They provide manufacturing staples like oil, natural gas, metal, paper and chemicals.

Popular companies in the materials sector include:

Industrials

The industrial sector consists largely of companies that produce aircraft, construction and agriculture equipment, and industrial machinery. These companies tend to generate positive cash flow and pay regular dividends.

A number of big-name, blue-chip stocks come from the industrials sector, including:

Consumer discretionary

Businesses in the consumer discretionary sector include companies that sell nonessential services and products to consumers. These are services and products consumers purchase with discretionary income — that portion of their income left after paying taxes and essential living expenses. Businesses in this sector include automobile, retail, hotels, restaurants and luxury goods.

A variety of companies crop up in this sector, including:

Consumer staples

The consumer staples sector is filled with companies that manufacture and distribute essential goods and services like food, household goods and personal care products. This sector is especially well-positioned to weather recessions because people continue to purchase these goods and services, even during an economic downturn.

Major players in this sector include:

Healthcare

The healthcare sector is made up of four major pillars: medical services, healthcare equipment, biotech services and pharmaceuticals. These businesses are typically well-positioned to weather the ups and downs of the market.

Big names in the healthcare sector include:

Financials

The financial sector includes banks, insurance providers and real estate firms. Revenue generated in this sector is directly correlated with interest rates on mortgages and other loans.

This sector is where you’ll encounter the financial big wigs:

Information technology

Information technology companies manufacture, develop and distribute software and electronics. This sector is deeply rooted in Silicon Valley and operates as one of the leading stock sectors of the 21st century.

Tech giants in the information technology sector include:

Telecommunication services

Media, entertainment and communications companies form the backbone of the telecom sector. Here, you’ll encounter Internet service providers, streaming services, cable companies and more. With the advent of the Internet, this sector was forced to evolve alongside our consumption habits.

Many will recognise the businesses that belong to the telecom sector:

Utilities

Businesses in this sector provide water, gas and electricity. These businesses have little competition thanks to the high cost of entry but the prices they charge are strictly controlled by local governments. Like consumer staples, an investment in the utilities sector is considered a safe bet during market downturns because of how essential utilities are.

Popular companies in this sector include:

Real estate

In the real estate sector, we find developers, management firms and real estate investment trusts (REITs). These companies own and operate commercial real estate that includes apartment buildings, shopping malls, office parks and more. Rent income and property value provide revenue and shareholders receive dividends.

Popular real estate sector companies include:

Finder survey: Which sectors do Australians most commonly hold stocks in?

How to invest in stock sectors

If you’d like to invest in a particular sector of the stock market, consider exchange-traded funds, or ETFs. ETFs are funds that contain a collection of securities — typically stocks or bonds — that track a particular stock sector or index. ETFs can be bought and sold for a single price like stocks and offer investors in Australia the opportunity to gain exposure to a specific industry sector.

Each sector has many ETFs to choose from. While you can purchase individual stocks within each sector, ETFs offer a basket of sector-specific investments that can help protect against market volatility.

Here are some of the most popular ETFs available in each sector for Australians to invest in:

Stock sectors and portfolio diversification

Stock sectors offer Australian investors the opportunity to diversify their portfolios. The stock market can be impacted by a variety of factors, including world events, exchange rates, interest rates and global politics.

Spreading your investments across multiple stock sectors can help reduce portfolio risk when a major event impacts the stock market. Instead of pooling your eggs in a single basket, spread your investments across multiple stock sectors and industries to broaden your opportunities, while reducing losses triggered by market volatility.

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Bottom line

There are many ways to invest in the stock market in Australia, and understanding the major stock sectors can help you decide where you’d like to invest and how to broaden the reach of your investment portfolio.

To invest, you’ll need to sign up for a brokerage account with a trading platform in Australia. Explore your trading options across multiple platforms to ensure you find the best account for your investment goals.

Frequently asked questions

• How do I trade ETFs?

  You can buy and sell ETFs from a brokerage account.

• What is a defensive stock sector?

  Defensive stock sectors typically maintain their earnings during recessions, making them better positioned to weather economic downturns than other sectors.

• How can I track sector performance?

  Many trading platforms in Australia come equipped with research tools and reports that offer stock sector performance indicators. Or you can do your own research using resources from third-party providers like Morningstar and Bloomberg.

Written by

Shannon Terrell

Writer

Shannon Terrell is a writer for Finder who studied communications and English literature at the University of Toronto. On any given day, you can find her researching everything from equine financing and business loans to student debt refinancing and how to start a trust. She loves hot coffee, the smell of fresh books and discovering new ways to save her pennies. See full bio