A market sector is a subdivision of the economy. Each sector includes companies that provide the same types of products or services and often compete with each other for customers.
For example, the utility sector includes companies that provide consumers with electric power, natural gas, water, or a combination of these services. The sector may also include companies who produce power and those that trade it. Though they may generate electricity in different ways or drill for natural gas in different parts of the world, these companies are all affected by changes in energy supplies, fluctuating prices, and government regulation, as well as challenges with delivery of services.
These companies, though they vary by size, reputation, or management style, share a number of characteristics that help to define the sector and differentiate it from others. For example, utility companies tend, as a group, to pay higher than average dividends, and their stock prices tend to be less volatile than the prices of telecommunications or technology stocks.
In general, average earnings per share, price/earnings ratios (P/Es), and other fundamentals tend to be reasonably consistent within each sector but often substantially different from the average fundamentals of other sectors. Realizing this is the case makes it easier to avoid comparing apples to oranges — or, in a more specific example, energy companies to retail stores — when evaluating them as potential investments.
Lists of sectors
There’s no official list of market sectors, which can sometimes create minor confusion about how many sectors there are, what they’re called, and what companies are included. For example, the same software companies may be identified by market research firms as belonging to sectors labeled either information economy or information technology. Sometimes media and telecommunications are combined as a single sector, sometimes they’re divided into two sectors, and sometimes the sector is called telecommunications services. Sometimes transportation is its own sector and sometimes it’s part of industrials.
Index providers Standard & Poor’s (S&P) and Morgan Stanley Capital International (MSCI) jointly developed and use the Global Industry Classification Standard (GICS) worldwide. It identifies 10 sectors, further subdivided into industry groups, industries, and subindustries — a practice that’s typical across index and research firms.
The Industry Classification Benchmark (ICB) developed by Dow Jones and FTSE also uses 10 core divisions, though refers to them as industries, which are further divided into supersectors, sectors, and subsectors. The research firms Morningstar and Lipper identify 13 and 7 sectors respectively.
Here’s the GICS sector list:
Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Telecommunications Services, Information Technology, Utilities
