Some people prefer to make their own investment decisions rather than work with a financial adviser. As stocks are part of a balanced portfolio, a wise investor learns how to separate the jewels from the junk. One way is to analyze stock sectors, which are the categories in which stocks are placed.
1. Research the nine major sectors of the stock market: basic materials, conglomerates, consumer goods, healthcare, financial, technology, industrial goods, services and utilities. Each sector contains several related industries. For example, the consumer goods sector contains the food, beverages, automobile, clothing and electronics industries. These industries are related. Their products are designed for consumer use rather than military or industrial use.
2. Choose the sectors in which you prefer to invest. Some investors prefer to spread their risk across all nine sectors while others invest in sectors that personally interest them.
3. Search for cyclical industries when the economy is strong and growing. Cyclical industries can earn a respectable profit in a strong economy, when consumers have money to spend. However, they are adversely affected by catastrophic events and a weak economy. For example, if there is a major flood with extensive damage, insurance industry stocks will decline in price as a response to the massive payouts to policyholders.
4. Search for defensive stocks when the market is volatile or in a downward trend, as they tend to not be adversely affected by a weak economy. Defensive stocks include industries such as food, as people have to eat regardless of their finances. These stocks do not generally increase as much as stocks in cyclical industries; however, many do pay dividends. They are mostly a line of defense for preserving capital and hopefully earning a profit when the economy is weak.
5. Choose strong performing companies within your chosen industries. Some are shining stars that consistently earn a profit and pay a dividend. Investors call them "blue chips." Other companies are well-managed but reinvest their profits rather than pay a dividend to the stockholders. These growth stocks are long-term investments.
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