Classification Of Stocks For Better Investments

Many of us are familiar with the saying "what goes up must come down then." And 'well-known that the change in the stock market regularly

. As these market fluctuations, it is important for investors to plan a strategy before you invest your hard earned money.

One of the ways that Stocks can be classified is on the basis of the type of business. Similar companies are grouped together for the purpose of comparison. These groupings can be called Sectors.

The Stock market can be classified into 11 different sectors. Two of these sectors are called defensive sectors and the other nine are called Cyclical sectors.

Defensive stocks represent those items and services for consumers and businesses that cannot be put off no matter what the state of the economy. These stocks remain stable even in an economic downturn. They include utilities and consumer staples like food, tobacco and oil. Even during hard times consumers still have need for food and energy, no matter what the price. Thus the value of the stock does not fall as drastically as other stocks.

However when the economy is expanding, the demand for utilities and consumer staples does not increase that drastically. Hence defensive stocks tend to lag behind in the market.

Cyclical stocks cover nine different sectors which are basic materials, capital goods, consumer cyclical, energy, finance, health care, technology, and transportation. These sectors are called cyclical because their value tends to move up and down depending on business cycles. The performance of these sectors is largely dependent on the economy.

Often before an economic upturn, the stock price of a cyclical company will rise. The same stock price will fall just before the downturn begins. Thus an investment in cyclical stocks can give maximum gains when the investor buys stock just before the economy starts to turn upwards.

The automobile industry is a good example of cyclical stocks. Consider the case of an individual that wants to buy a car. He will do so when the Market is in an upswing. This is because the individual would be more financially stable at that time. However when the economy is in a downturn, the individual would probably put off buying the car. This could be for a number of reasons that include layoffs or high interest rates.

It is important that investors keep an eye on the economy, the creation of portfolios. He may be partly cyclical and defensive stocks. cyclical stock is to ensure getting a good return when the market is up. defensive equipment to ensure that their losses are minimized when markets are falling.

by: Ganesh Mhatre

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