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What Is Industry Sector Analysis?

Jim B.
Jim B.

An industry sector analysis is A process by which an investor or analyst studies a particular group of stocks that are linked by the industry of the companies that issue them. The theory behind this practice is that a group of similar stocks, known as an industry sector, will tend to perform in tandem with each other. It is possible to study an industry sector using the same analytical tools — such as technical analysis or qualitative techniques — used on an individual company or stock. Investors performing an industry sector analysis often do so with the intent of choosing stocks by sector rotation, which involves buying from the hot sector, or by the top-down approach, which entails taking the best stocks from the sectors performing the best.

Due to the sheer multitude of stock choices placed before them, it can be daunting for an investor to choose one or just a few. It is also practically impossible to analyze all of the stocks in the world. Following a whole sector of stocks, however, is less of a chore. For that reason, many investors believe in industry sector analysis as the best way of choosing stocks.

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Performing an industry sector analysis requires choosing the desired sector to be studied. Sectors can be large groups, like all technology stocks. Investors can also narrow sectors down to sharpen the focus of an analysis. For example, an investor could narrow the technology field down to just manufacturers of microchips.

Once a sector is chosen, there are different ways for an investment expert to perform an industry sector analysis. One way to do it is to analyze the various financial reports of the companies in the sector that issue stock. Another way is through technical analysis, which is strictly based on using the past price performances of stocks in an effort to judge where those prices will be in the future. No matter the method chosen, an investor should take care to consider information from all of the pertinent companies in the sector and come to some sort of sector-wide conclusion.

There are a few different ways that an investor can use the information gleaned from an industry sector analysis to choose stocks. Sector rotation is a strategy which necessitates choosing stocks from the hottest sectors. When stocks from those sectors become overbought and prices start to fall, other sectors that are improving rotate in to provide the investor’s selections. The top-down strategy is another sector-based technique involving the selection of the best stocks from the best sectors.

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