Stock Trading Tips- How To Pick The Best Markets, Sectors And Industry Groups?
Stock picking done right can help you a lot
Stock picking done right can help you a lot. But you need to keep this in your mind that stock picking is just the first step in any stock trading system. What you need is a good stock trading system. Once you have that then stock picking is only the start of your investment process.
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.
Now S&P 500 Stock Index just tracks the performance of 500 companies based on their market capitalization. There are overall something like 200 industry groups in the US economy. S&P 500 includes much smaller industry groups. Now, stocks in a given sector do not perform at the same rate. So even if a sector is outperforming the market, there may be segments of that sector that might be performing extremely well and other segments that might be lagging behind the market.
What is most important for you to know is what industry group within a sector is performing extremely well. This knowledge can make the difference between superior and average results. So, what you need to learn is how to dissect the market into relevant industry groups. For example, the medical industry can be divided into these industry groups; hospital companies, generic drugs, genetics, biotech, dental, home nursing, HMOs and more that you should identify yourself.
by: Ahmad Hassam
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