CommSec
20 August 2018
How is the sharemarket categorised?
CommSec
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 132.3 billion.1 The highest priced stock on the S&P 200 index is Cochlear Ltd (COH) valued at AUD 205.09 per share.2
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.
Tags:
Strategy & Education
View all insights
You may also be interested in..
Know where you’re heading with clear investment goals
CommSec
3 August 2018
Learning how to set investment goals can help you plan, budget, and choose the right investment options. Find out how to set clear investment goals and keep your investment strategy on track.
Six things every investor should consider in their investment plan
CommSec3 August 2018
Sticking to an investment plan is the key to success for many investors. We look at why planning is so important, and how to write an investment plan that works for you.
Should you invest in international shares?
CommSec
17 May 2018
International investing is on the rise for Australian investors, thanks to booming overseas markets and big name stocks like Facebook and Amazon. Is it time to dip your toes into the global market?
Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec") is a wholly owned, but non-guaranteed, subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 ("the Bank") and both entities are incorporated in Australia with limited liability.
This information is directed and available to and for the benefit of Australian residents only and is not a recommendation or forecast.
Information presented in this article is not advice and has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Any prices or securities used in the examples in this presentation are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to the individual's objectives, financial or taxation situation and needs, and, if necessary, seek appropriate professional advice. The article is written by external companies that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. The CBA Group does not accept any liability for losses or damage arising from any reliance on external companies and their products, services and material.