What are Sectors? Industry vs Sector for Diversification

Howdy Wall St. Willy! When we talked about investing in stocks, you talked about diversifying among large cap, mid cap and small cap stocks.

But, is there any other way of diversifying while investing in stocks?

That’s a great question, Sooper Cooper! Another great way to diversify is to invest in different sectors.

Sectors?? I have never ever kever heard about sectors. What are they anyway?

A sector is an individual segment of the economy or in other words a large group of similar businesses. For e.g., retail, healthcare and financial services are all sectors.

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Well, I’ve also heard about the term industry. Is it the same as a sector?

Although they are often used interchangeably, sector is a broader classification compared to industry. Usually multiple industries make up a sector.

For e.g., banking, insurance and brokerage are some of the industries that make up the financial services sector.

How can I achieve diversification by investing in different sectors?

Government policies, changes in interest rates, inflation etc., affect different sectors differently. That’s why stocks across sectors never ALL go up or down at the same time.

So, when you diversify across sectors, the losses you make in a sector that goes down can be offset by the gains in a sector that goes up.

Thank you very much for telling me about sectors, Wall St. Willy.

You are welcome, Sooper Cooper. Remember, Finance is Your Friend!

Sectors Industry and Diversification
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