One of the keys to success when stock trading, is to have a well-diversified portfolio. This can involve trading in various ways to access the market, but also investing in stocks from different industries.
These are known as stock sectors, and can be affected by different fundamental factors. As such, it can help limit the risks of your trade or hedge against your losses from a particular stock, if you invest in different stock sectors.
The categories themselves collate the stocks from the same industry, and therefore will likely fluctuate in the same manner. The sectors give the market some structure, and was first identified by the Global Industry Classification Standard (GICS) in 1999. At the time of writing, there are 11 official stock sectors in the industry classification system.
In order to begin to diversify your investment portfolio, let’s take a look at some of the most popular stock sectors amongst traders.
You may be familiar with natural gas and oil as assets of the commodities market. But when it comes to stock trading, you can invest in the companies associated with the energy industry.
You can trade stocks from companies that are involved in the extraction or production of the commodity, like crude oil, coal or electricity, for example. There are currently seven sub-industries within the energy sector.
Unsurprisingly, this means that the stock prices have an intrinsic relationship with the value of the commodity in its relative market. Therefore, investing in the energy sector involves monitoring both the commodity and stock market, as well as any geopolitical events that can have an impact. On some occasions, this could mean the energy stock sector experiences high volatility levels.
However, in general, energy stocks are seen as a stable investment, as it mainly consists of big oil companies, such as Royal Dutch Shell (RDSA) and BP PLC (BP). It’s worth noting, that this sector does not include renewable energy companies — these are classed as utilities.
The financials stock sector has 17 sub-industries, and consists of companies associated with money and finances — as the name would suggest. You can trade stocks of companies, such as insurance brokers, mortgage lenders, payment processors, or consumer finance providers. However, the majority of stocks in this sector are made up of banks, such as the largest US bank, JPMorgan Chase (JPM).
Another sector seen as a particularly stable investment, financial stocks do not tend to fluctuate in value, in comparison to other industries. However, they are closely linked to the economy, and so can be monitored alongside the forex market and the corresponding currency pair.
As a result, significant economical events or data releases can affect the prices of stocks in this sector.
The technology sector can experience extreme volatility, as the industry is continuously developing. The stocks that make up the sector tend to be new, or fast growing, and can include companies involved with tech software, hardware, manufacturing of equipment and components, or provide tech-related services.
This sector also includes household names, such as Apple (AAPL), Microsoft (MSFT) and Facebook (FB).
Different ways to trade stocks
Trading across the different stock sectors is just one way to diversify your portfolio — there also different ways you can access the stock market, through cash equities and financial derivatives, for example. This can include contracts for difference (CFDs).
Trading CFDs enables exposure to the stock market, without owning the underlying asset. Instead, the value of the trade is based of the price difference between entering and exiting the contract. It also allows you to speculate on the price movement of the stock market, and open a position on both a rising and falling market.
However, as stock CFDs do not involve ownership, compared to traditional stock trading, you are not entitled to any additional rights, voting or dividends.
As with any investment, when trading stock CFDs, it is always best to conduct extensive research beforehand, and ensure that you’re a using a reputable and regulated online trading platform.