How is the sharemarket categorised?

CommSec CommSec

20 August 2018


This article was written with contribution from Ramzy Kaur, International Derivatives Market Dealer, CommSec Advisory

There are over 2,200 companies that trade on the ASX.1 With so many companies to choose from, where can you start your research?

One approach is to start by looking at the different categories within the sharemarket.
 

Categorising by sector and industry

The sharemarket is divided into broad segments based on things like company size, economic activities, and business activities.

First, the market is separated into sectors. Sectors are groups of companies that engage in similar economic activities.

The ASX has 11 main sectors:

  • Energy
  • Materials
  • Industrials
  • Consumer Discretionary
  • Consumer Staples
  • Health Care
  • Financials
  • Information Technology
  • Telecommunications Services
  • Utilities
  • Real Estate

Next, these sectors can be broken down into industries. Industries are groups of companies that share similar business activities (i.e. what they do to make a profit).

For example, in the Consumer Discretionary sector you might find companies that belong to the media, retail, or gambling industries (e.g. Seven West Media, JB Hi-Fi, or Star Entertainment Group). 
 

Categorising by market capitalisation

The market can also be segmented according to the market capitalisation of different companies. Market capitalisation refers to a company’s size, and it’s calculated by multiplying the total number of shares on issue by the share price.

There are large, mid, and small cap companies. The stock with the largest market cap on the S&P 200 is the Commonwealth Bank (CBA) with a market cap of over AUD 129.2 billion.1 The highest priced stock on the S&P 200 index is CSL Ltd (CSL) valued at AUD 186.60 per share.2 (Prices quoted as at 26 February 2019.)

How to use sectors to choose investments

Sector analysis can be a useful tool when you are deciding what companies to invest in. If an investor has decided to invest in a particular sector, all they need to do is drill down into the individual stocks that make up the respective sector and find a good company.

This generally works best in a market that’s rallying higher, as you want to invest in sectors that outperform the equities market.

One approach is known as “Top Down analysis”. This involves looking at the overall health of the economy, identifying current economic trends, and then looking for sectors that are well placed to benefit from those trends. If you have a CommSec account, you can research sector performance on our website by logging in, going to Quotes & Research, and selecting "Sectors".

An ETF can give you exposure to a particular sector, so if you identify a sector that is performing well, you could invest in an ETF that gives you relevant exposure.
 

How to choose a company within a sector

Once you’ve chosen a sector, you can use a similar approach for choosing what shares to invest in. Look for shares that are outperforming their peers within the sector that you’ve chosen. Shortlist potential companies and then use your preferred stock analysis methods to assess their opportunity. Most investors will typically look at ratios like Price to Earnings (P/E), Price to Book (P/B) and Dividend Yield to analyse and compare different companies.

You can also use company reports, financial news articles, subscriptions and broker research to help you make your decision.

Remember, it always pays to keep up to date with both market events and individual share news, especially regarding any shares you directly own.

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