How the stock market works
Introduction|
Course|
Q&As |
Recommended reading|
Quiz |
100
9. Sectors
Putting companies into 'market sectors', like indices, helps comparative analysis. Whereas indices tend to be based on the size of companies (although not exclusively so), sectors group them according to the industry they are in.
Some sector headings that you'll recognise are:
- industrials
- leisure
- retailers
- electrical
- alcoholic beverages
When newspapers list company share prices, they also put the companies under the relevant sector, which makes it easier for you to quickly look up a company. The Financial Times, the Times and the Daily Telegraph all use the sector classifications of the FT-A index, so whichever paper you look in, the companies will be in the same place.
Sectors have two main uses:
- Firstly, in deciding whether a share price is good value or bad value, it helps to look at companies in the same sector. If Company A is on a P/E of 15 and Company B is on a P/E of 26, and they are both in toy retailing, you would certainly want to find out why before buying either. You would also want to compare the P/Es to the average P/E of the whole sector.
- Secondly, if you plan to run a diversified portfolio in order to minimise risk, one way to do this is to have no more than 2 shares in each sector. So a portfolio of 20 shares might span 10 sectors. The logic is that one or two sectors may fall out of fashion, but usually this will be compensated by other sectors coming into fashion.
Recommend Reading
){kind=link}