Sector Classification in stock markets
As per our understanding from previous units, we know by now, the stock market works on the concept of sector rotation. It is one of the key strategies to be followed by any market participant to create wealth. Stocks reflect not just economic factors, but also government interventions and that may reflect into share prices of companies of that sector. Among the leading or lagging sectors, we often see the periodic rotation. This is like a relay race where the baton is passed from one sector to another among the overall leadership group as the market moves. Hence for a short-term trader too it is very important to keep track of how different sectors are behaving.
Sectors can be classified in different ways:
One way is grouping companies by the product and services they offer. For example, the firms that extract crude oil will constitute the Oil & Gas Industry. Firms can also be classified according to their sensitivity to business cycles. The sector which moves in accordance with the cycle is known as the cyclical sector and the one that is not impacted by the market cycle is known as a defensive sector/ non-cyclical sector.
Cyclical Sector: Stocks belonging to sectors such as Metals, Oil & Gas, Cement, Real estate, Capital Goods, etc. are known as cyclical stocks. The performance of these sectors are directly related to the economic cycle. If there is a market downturn, these sectors are the hardest hit. Similarly, these stocks are known for outsized returns in times of bull markets. Increased consumption, more production, more construction and infrastructural development propel these stocks to greater heights.
Defensive sector/ non-cyclical sector: Stocks belonging to sectors such as Utilities, Consumer non-durables, Pharma, IT are known as defensives. They are unperturbed by any downturn in the economic cycle. For instance, even if there is a recession, people do not stop or cut down expenses on utility services like electricity, healthcare services, consumer goods and other basic necessities. These stocks are known to outperform during periods of economic downturn and underperform during times of economic expansion.
Statistical methods such as Cluster Analysis can also be used for classifying stocks. In this method, firms that have historically high correlated returns are grouped together. However, this method has limitations because historical data might be biased.
Now the question may arise: How to track the broad market indices representing a particular sector?
The StockEdge App has been designed keeping the specific needs of varied investors now. It has become an indispensable toolkit for both traders and investors alike!
Real-time market data can be accessed using this link or the mobile application.
The StockEdge homepage:
After clicking on the highlighted icon, the following page shall appear. Herein, stocks have been categorized into forty-one divisions to help investors filter stocks based on their nature of business.
We believe that this feature will help a market participant to get a clear understanding about the performance of a particular sector as well as conduct advanced research by proper classification of stocks.
There is also a Commercial Classification System which includes the Global Industry Classification System developed by Standard & Poor.
Sectors and firm compositions used by the commercial providers are listed below.
1. Basic Materials:
A. Building Materials.
C. Containers and Packaging.
D. Metals, Minerals and Mining.
2. Consumer Discretionary:
C. Hotels and Restaurants.
D. Personal Care Products.
A. Energy Exploration.
D. Energy Equipment.
E. Energy Services.
5. Financial Services:
C. Real Estate.
D. Asset Management.
E. Brokerage etc.