When reading business news, you’ll see updates that are focused on specific economic sectors. You may wonder what to do with this information as an investor, or whether it matters to you at all.
Simply put, understanding sectors can help you find opportunities, manage risks, and make informed financial decisions. In this article, you’ll learn about the different economic sectors and why they’re worth looking into.
What are sectors?
Sectors are groups of institutions with similar business activities, products, and services. They represent areas of a nation’s economy and can hint at its health. Here are the types to know:
- Economic sectors
A country’s economy is classified into 4 main sectors: primary, secondary, tertiary, and quaternary. They are grouped based on how involved they are with the Earth’s natural resources.
| Types of sectors | What they do |
|
Primary sector |
Extracts, harvests, or processes the Earth’s natural resources. Examples include mining and agriculture. |
|
Secondary sector |
Produces finished goods using natural products. Examples include manufacturing and construction activities. |
|
Tertiary Sector |
Sells goods and provides services to consumers and businesses. Examples include retail, banking, and healthcare. |
|
Quaternary sector |
Engages in intellectual activities. Examples include education, research, and information technology. |
In the Philippines, the economy can instead be divided into 3 major sectors that contribute the most to the gross domestic product (GDP). These are industry; services; and agriculture, forestry, and fishing.
- Market sectors
For financial markets, economic sectors are broken down into specific categories. The Philippine Stock Exchange (PSE) groups publicly-listed companies into 6 main sectors.
These are: financials, industrial, holding firms, property, services, and mining and oil. Take note that different countries and markets may define sectors in unique ways.
Why sectors matter when investing
1. Their performance can indicate economic health
Analysts look at sectors to help identify whether the economy is growing or slowing down. In turn, the growth or decline of an economy may affect investment sectors differently.
Some sectors tend to be more heavily affected by these cycles. Others may remain stable or continue to perform well no matter what’s happening to the economy.
To make informed decisions, it helps to know how different sectors may perform under certain circumstances. This is especially important if you’re thinking of investing or have already invested in these sectors.
2. Sector analysis can help you identify opportunities
When choosing where to invest your money, you may find suitable options by looking into different sectors. You can assess the demand for each sector’s products or services to know if they might offer growth.
Another way to identify sector-specific opportunities is by understanding how different sectors perform under different market conditions, and how different sectors affect each other.
This way, you can invest heavily in favorable sectors for a particular economic condition, or avoid dabbling into certain sectors on seasons they are historically weak.
3. Knowing sector-specific risks can help you build a stronger portfolio
Though they may offer unique growth opportunities, economic sectors also carry their own sets of risks. Learning these sector-specific risks can help you check for weak spots in your portfolio.
You might be able to identify if there are investments you can add or if there are better ways to allocate your money. Investing across multiple sectors is one way to diversify and spread risk around.
