Use these stock picking tips to select the best markets, sectors and industry groups while investing in stocks. Stock picking done right is the first step in any winning stock trading system. After that comes the other step. So, you need to take your first step well if you want to do well with the later steps.
So what is a sector? A sector is a broad group of industries in an economy. For example, finance is one sector of the economy that might include banks, investment banks, pension funds, mutual funds and so on. Transportation can be another sector of the economy and it can include the airlines, railways, trucking services and so on. Consumer goods and services can be another sector of the economy. What is an industry group? An industry group is a smaller more specific grouping of companies in a sector. A subgroup will be even a more specific subcategory of companies in an industry group. Confused? Let’s make it clear with an example. Viacom is a well known name. Viacom is film, TV and radio company.So the sector of Viacom is Entertainment and Leisure industry. Within that industry the group is Media and within that group, the subgroup is TV/Radio.
Majority of the leading stocks are usually in the leading sectors. Research and study over many years has shown that 37% of the stock price movement is tied to the performance of the industry group the stock is in. Another 12% is due to the strength in the overall sector. So, you can see almost half of the stock price movement is tied to the performance of the industry group. Now, we all know specific groups lead in each market cycle, so you can see the importance of considering a stock’s industry before making the purchase.
There are something like 200 industry groups in US economy. Stocks in the same sector do not behave in an identical manner. So, if a sector is outperforming the market, there will be groups and subgroups that will be outperforming in that sector while there will be groups and subgroups that might be showing weak performance in the sector. Looking at the S&P 500 index does not give you any clue about the performance of the different sector, industries and sub groups in the market. S&P 500 only shows the combined performance of 500 stocks that are included in it.
