Industry sectors are groups of similar companies and businesses which share characteristics and produce related goods and services. Investors and financial analysts use these sectors to compare companies against each other, since comparing the financial information of companies from two different sectors would be meaningless. There are several different main industry sectors, which can be broken down even further into smaller subsectors. Once all of the companies in a specific sector are compiled, investors can perform sector analysis as a way of separating the best companies from the worst in a specific industry.
The stock market is filled with thousands of companies from all over the globe producing disparate goods and providing unique services. Looking at all of these companies as a whole can be daunting for investors when attempting to decide which stocks to choose. As a result, it can be helpful for investors and analysts to break all of these companies down into rough categories. These industry sectors allow for much easier comparison and analysis.
There are several main industry sectors which, when taken together, contain just about every imaginable company and business. Some sectors, like utilities and consumer staples, are considered defensive industries because of their stable nature. Other sectors, like the technology or health care sectors, are more susceptible to ups and downs. From these main sectors, other smaller subsectors may be derived. For example, the health care industry can be split up into drug companies, insurance providers, health-care equipment manufacturers, and so forth.
Identifying the different industry sectors makes the prospect of comparing different companies much less imposing. As the sector is broken down even further into smaller groups, the amount of information that analysts have to parse becomes much smaller. Many analysts also try to judge how a sector is doing as a whole as a means of choosing individual stocks. This theory is based on the fact that a sector that is performing well can often pull all stocks included in it in an upward direction.
In addition, the ability to compare companies in the same sector to determine the best performers is a useful analytical tool. Most industry sectors have certain companies which set the standard for performance in those sectors. Those companies are often referred to as benchmark companies, and they can be used as a basis for comparison. Using the information gleaned from income reports and balance sheets, analysts can take one company and hold it up against the benchmark in its specific industry sector to see how it stacks up.