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Investors use industry sectors to compare companies producing related goods and services. Major sectors can be divided into smaller sub-sectors, making analysis less overwhelming. Benchmark companies set the standard for performance in each sector, allowing for easy comparison.
Industrial sectors are groups of similar companies and businesses that share characteristics and produce related goods and services. Investors and financial analysts use these sectors to compare companies, as comparing the financial information of companies from two different sectors would not make sense. There are several major industry sectors, which can be further divided into smaller sub-sectors. Once all companies in a specific industry are compiled, investors can perform industry analysis as a way to separate the best companies from the worst in a specific industry.
The stock market is full of thousands of companies from all over the world producing different products and providing unique services. Looking at all these companies as a whole can be daunting for investors when trying to decide which stocks to pick. As a result, it can be useful for investors and analysts to break all these companies down into rough categories. These industry sectors allow for much easier comparison and analysis.
There are several major industry sectors that, when taken together, contain virtually every company and business imaginable. Some sectors, such as utility companies and consumer staples, are considered defensive industries due to their stable nature. Other sectors, such as technology or healthcare, are more susceptible to booms and busts. From these main sectors, other smaller subsectors can be derived. For example, the healthcare industry can be divided into pharmaceutical companies, insurance providers, healthcare equipment manufacturers, and so on.
Identifying different industry sectors makes the prospect of comparing different companies much less overwhelming. As the industry is further divided into smaller groups, the amount of information analysts need to analyze becomes much less. Many analysts also try to judge how an industry is doing as a whole as a means of picking individual stocks. This theory is based on the fact that a well-performing sector can often pull all stocks included in it in an upward direction.
Additionally, the ability to compare companies in the same industry to determine top performers is a useful analytical tool. Most industry sectors have certain companies that set the standard for performance in those sectors. These companies are often referred to as benchmark companies and can be used as a basis for comparison. Using information gleaned from earnings reports and balance sheets, analysts can take a company and compare it to the benchmark in their specific industry sector to see how it performs.
Asset Smart.
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