Use these stock picking tips to select the best markets, sectors and industry groups while investing in stocks. Stock picking done right is the first step in any winning stock trading system. After that comes the other step. So, you need to take your first step well if you want to do well with the later steps.
First, we need to understand what a sector, a group and an industry is. A sector is abroad grouping of companies and industries. So a sector can be consumer goods and services, transportation, finance or even hi tech. An industry group is a smaller more specific group of companies. So there may be several industry groups within a sector. A subgroup is even more specific dividing the industry group into more precise subcategories. Let's take the example of Viacom. So the sector is Entertainment and Leisure Industry. Group should be Media and subgroup will be TV/Radio.
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Majority of the leading stocks are usually in the leading sectors. Research and study over many years has shown that 37% of the stock price movement is tied to the performance of the industry group the stock is in. Another 12% is due to the strength in the overall sector. So, you can see almost half of the stock price movement is tied to the performance of the industry group. Now, we all know specific groups lead in each market cycle, so you can see the importance of considering a stock's industry before making the purchase.
Now S&P 500 Stock Index just tracks the performance of 500 companies based on their market capitalization. There are overall something like 200 industry groups in the US economy. S&P 500 includes much smaller industry groups. Now, stocks in a given sector do not perform at the same rate. So even if a sector is outperforming the market, there may be segments of that sector that might be performing extremely well and other segments that might be lagging behind the market.
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What is most important for you to know is what industry group within a sector is performing extremely well. This knowledge can make the difference between superior and average results. So, what you need to learn is how to dissect the market into relevant industry groups. For example, the medical industry can be divided into these industry groups; hospital companies, generic drugs, genetics, biotech, dental, home nursing, HMOs and more that you should identify yourself.
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