The Positives and Negatives of Buying Stocks in Common Sectors

By: Mark_Adan

There are more than 58,000 companies listed on stock exchanges globally, each with positives and negatives attached to them. All stocks fall under one of 11 stock market sectors using the Global Industry Classification Standard (GICS), a global categorization system designed to make it easier for investors to find the perfect investment opportunity.

Naturally, some market sectors carry a higher risk than others because of how they are exposed to external market conditions. For example, the ongoing Russia-Ukraine war continues to cause havoc in the energy sector, particularly in Europe. Furthermore, the cost of living crisis gripping much of the world right now means consumers have less disposable income, which has a knock-on effect in the leisure sectors. One only has to look at the recent huge drop in Ohio sports betting revenue to see that in effect.

Sometimes, companies can see huge gains during challenging market conditions. For example, Amazon thrived during the COVID-19 pandemic due to a surge in online shopping, as did Netflix because people were locked down at home and needed entertainment on tap. You are about to learn more about some of the most popular stock market sectors, including the positives and negatives attached to them.

Information Technology Sector

The information sector is often referred to as the tech sector. It covers a range of companies, from software and services to hardware and equipment, and semiconductors, among others. Some of the biggest companies on the stock market, such as Microsoft and Apple, come under the information technology banner.

Established tech companies are often a solid investment because their products drive industries worldwide. Companies such as Apple have various revenue streams, so if sales of its popular iPhone fall, it can fall back on its streaming service or computer arm. Microsoft is similar because its Windows operating system is preinstalled on every new non-Apple computer and is heavily involved in the video game industry.

The surge in the popularity of Artificial Intelligence has pushed Nvidia's stock northwards, too. Nvidia produces some of the most powerful graphics cards on the planet, and although it has suffered slightly due to a global shortage of semiconductors, it continues to thrive.

Newer tech companies can be risky for a multitude of reasons. Many fledgling tech companies cannot monetize their product or service for the first few years, in addition to spending vast sums of money on getting their products off the ground.

Financials Sector

The financial sector is where you find businesses such as banks, insurance companies, financial technology companies, and other consumer finance providers. Millions of investors plow their money into the world's major banks because financial institutions are considered rock solid and are rarely negatively affected by broader market conditions.

The banks make more money when interest rates increase and find that people spend and save more money with them when those same interest rates fall. Take a look at the most recent financial figures released by listed banks to see the ridiculous profits they make. Furthermore, as banks are a crucial component of the global economy's health, governments will almost always step in and bail them out during a financial crisis.

Insurance companies are also great to invest in but are exposed to more risks than banks and credit card companies. While they can increase their earnings from fixed-income investments as bond interest rates rise, they are also at the mercy of uncontrollable factors. The COVID-19 pandemic significantly ate into the profits of health insurance companies, while those specializing in vehicle insurance are met with vastly increased repair costs. However, insurance companies directly pass these increased costs and risks to their customers through annual premiums.

Energy Sector

The energy sector is the home to some of the biggest and wealthiest companies globally. These companies specialize in extracting, refining, and transporting fossil fuels, producing oil and natural gas, and exploring. Companies such as ExxonMobil, Chevron, and Shell are just three goliaths of the energy sector.

Although most countries are shifting towards greener energy sources as part of the battle against climate change, fossil fuels are used by almost every industry on the planet, while most vehicles on the road use petrol and diesel.

It does not matter how expensive petrol and diesel become at the gas station, consumers will always buy them to power their vehicles. Likewise, industrial companies will always purchase coal, oil, and gas to continue their operations. While those companies endure the cost increase, the energy companies enjoy bumper profits.

Be wary of smaller companies in the energy sector's exploration side. Exploration is massively expensive, yet finding untapped oil and gas deposits is notoriously tricky. Even if the company does find a vast deposit, it is challenging to extract from the source. Many small exploration companies' stock price surges when they announce they have found a significant deposit but then plummets when that deposit is not as large as first thought or they find it practically impossible to extract it from the ground or sea.

Consumer Discretionary and Consumer Staples

There are two sectors dedicated to consumer products: Discretionary and Staples. The former usually offer high-demand products and services but are not typically essential to day-to-day life. At the same time, the latter are products and services considered necessary to everyday life.

Companies in the Consumer Discretionary sector benefit from a strong economy because consumer spending is high. Consumers with disposable income often treat themselves to items and products in this sector, such as Starbucks, gaming, etc. However, in times of financial hardship, when consumers tighten their belts and cut their cloth accordingly, this sector tends to see reduced revenue (and therefore profit) because people cut back on non-essentials.

Consumer Staples often perform well regardless of the state of the economy because they provide goods and services essential to living everyday life. Irrespective of a booming or shrinking economy, people still need to shop for food, toiletries, and hygiene products, which is why the likes of Walmart, Procter & Gamble, and Colgate-Palmolive are popular with investors.

By Mark Adan

MarkAdanSEO@gmail.com

At Animuswebs.com, we specialise in content-led Online Marketing Strategies for our clients in the Marketing, Finance, Business industry and other sectors. With our professional writing team and our superb content creation programmes we achieve great marketing successes for our clients.

Copyright 2023 © Mark Adan - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.