The Elementary-finance stock trading tutorial continues today with an explanation of sectors. What are they? How do sectors make us a better investor?
Think through your every day life for a moment. Go through your day today and think about how many different businesses you visited. My day started with a little breakfast at a local restaurant. After that, I got some gas and went to work. On my lunch break, I stopped by the dry cleaners, and finally at the end of the day, I bought some software. Of course, I had to use my credit card to make purchases and I work in the education field. I paid taxes on my purchases and of course, I made my way from place to place in my car.
How many economic sectors impacted me? By my count, 8 economic sectors. I started in food service, went to energy, work in the education field, dry cleaners would be considered consumer discretionary, and the software also from consumer discretionary but this time, a retailer. The credit card impacted the financial sector, taxes is government, and of course the auto sector.
You could put together the same kind of story but let’s look at this in light of the investor. The world’s economy is huge and for that reason, it is divided in to sectors. On days when the Dow Jones or S&P are up or down dramatically, we can see all sectors up or down with them but that is rarely the case.
More often, sectors go in cycles and those cycles are not correlated. When the energy sector is up, the transportation sector may be down. Often these cycles are long term. Sometimes months or even years. They also have short term cycles which stock traders will attempt to time. Aren’t you glad you read our stock trading tutorial?
You may have heard of diversification. Diversification is simply making sure that your stock portfolio has a balance of different sectors. You will most likely never have every sector represented but you should make sure that you don’t have all of your stocks in one sector.
Because all of the sectors will rarely go up or down at the same rate, this protects your portfolio from big losses.
Now that our stock trading tutorial has taught you about sectors and diversification, take a look at your portfolio and see what you need to do