Candlestick Trading Blog

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Stocks – How are they classified?

They are classified by the type of business and are put into one of two groups. The first group is called cyclical and the second group is called defensive. Not only are they classified as one of these two groups but they are also categorized into 11 different stock sectors. Also referred to as market sectors, the idea is to find commonalities between different types of stock in order to have a measure of comparison. This article will identify the different 11 sectors as they relate to the cyclical and defensive groups. It is important to understand the different types of sectors when learning about the stock market as it is obviously an integral part of stock investing.

Cyclical stocks are considered cyclical because they have a tendency to move up or down in relation to business cycles and other factors of influence in the stock market. They are considered cyclical as well because when one sector is going up another may be going down. In looking at the list below, you can see that these sectors are pretty much self-explanatory.

Nine of the 11 sectors are considered cyclical and they include the following:

1) Basic materials
2) Capital goods
3) Communications
4) Consumer cyclical
5) Energy
6) Health Care
7) Technology
8) Transportation

The importance of providing sectors is to be able to find relationships between different types of companies and it also provides the ability to investors to ensure portfolio diversification. The idea is to invest in variety of sectors in order to minimize risk.

Defensive stocks include consumer staples and utilities. This group provides a good balance to portfolios because they are constant. People will never stop using energy or stop eating food. They typically contain low volatility and offer protection to investors in a falling market. While they are stable and consistent they also don’t rise with a rising market. Due to this they are often used in hedge funds. Successful traders understand that in order to build a solid investment portfolio, they must invest in both groups.

Stock screening programs allow you take a look at the different sectors and to select based on a multitude of criteria. Investors will typically search on the industry type, sales, market cap, dividends, and more before investing in a company. Stock screeners are great resources because they look at all of the companies listed on major stock exchanges and they pull them according to your criteria. This again helps investors to diversify their portfolio and it cuts down tremendously on time spent researching online. 

For new investors interested in online trading, there is a lot to learn. Not only do you need to understand the different classifications, but you also need to learn about fundamental and technical analysis to determine the type of trading that you are interested in. Once you have determined your investment philosophy, you then must research the different trading strategies available to you. Online investing is a great way to make money and with the right amount of knowledge and focus the sky is the limit!