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Economics is a difficult field, especially in terms of understanding and studying.
However, when seeking employment, it's common to encounter questions about your perspective on specific economic sectors. This is especially true if your job is connected to finance or investment, where a deep understanding of various sectors is crucial. What is an economic sector in general, and what do you need to know about each one?
Sectors represent fundamental classes or categories of economic activities. They organise companies based on their shared functions or areas of operation within a country's economy. Although several approaches exist to classify sectors and debates about their true number, four sectors are most often recognised. Of course, each sector can also have its subgroups and branches. Understanding economic sectors will allow you to:
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Facilitate the selection of assets for investment, portfolio diversification, and competent analysis of investment risks and prospects. This analysis takes into consideration the current economic phase of a specific market. Diversify the portfolio and accurately assess the risks and prospects of investments, considering the current economic situation of a particular market. All this is crucial for any investor, banking specialist or developer of financial instruments. Therefore, we will discuss sectors and their associated investments individually.
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Assess the trends and growth rates of a specific country's economy to help determine its current stage of development. Understanding these trends will empower you to make more informed decisions when launching startups, managing businesses, and gaining insights into the current job market requirements.
Therefore, developing countries where the market economy is only at the formation stage will have only one maximum of two dominant sectors of activity, not four. Furthermore, countries that are heavily dependent on oil production or the sale of other raw materials to consumers in more developed countries. Simultaneously, in more developed countries, the four primary economic sectors tend to be larger, and each of these sectors, in turn, has a greater number of subsectors. Economic trends can also be monitored using the same principles: if the commercial real estate sector increases, this leads to increased economic growth and, at the same time, leads to a rise in the construction and manufacturing sectors. On the flip side, a significant surge in the household goods sector-such as a massive increase in purchases of items like toilet paper or groceries-could be a warning sign of an impending crisis and a simultaneous economic downturn. A similar situation, for instance, was observed at the beginning of the coronavirus pandemic, which paralysed economies worldwide. In short, everything is interconnected, and reading economic sectors is like glimpsing into the future.
The four main sectors of the economy
According to the most common and widely accepted approach, any economy can be categorised into four sectors.
The primary sector
Or the raw materials sector. This includes companies engaged in the extraction of natural resources or agriculture. That is, they exploit the natural resources of our planet. This sector, often called the oldest (hence why it is called primary), holds a significant economic position. It serves as the foundation from which economic development and formation originate. The primary sector, however, does not hoard resources; instead, it functions as a relay, transferring these resources to commercial enterprises in other sectors.
The sector is categorised into four main subsectors based on the nature of their activities:
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Mining
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Fishing
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Hunting
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Forestry
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Agriculture
The primary sector always dominates and absorbs the human resources in countries with newly emerging economies. Then, developed countries will use new technologies and equipment in the primary sector, which means that the primary sector in developed countries only accounts for a small percentage of employment. The higher it is, the less developed the country's economy is.
The secondary sector
This sector comprises companies that process, construct, and produce goods using resources extracted by the primary sector. This encompasses all businesses that engage in the following areas:
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The production of cars and equipment
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The textile industry
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Chemical engineering
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Aerospace construction
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Shipbuilding
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The energy industry
The tertiary sector
The tertiary sector encompasses companies that provide financial services or operate in the entertainment and retail industries. These companies offer services to businesses in other sectors and private consumers through the sale of goods (which are also produced by the secondary sector). Therefore, the tertiary sector is divided into:
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Retail sales
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Transportation and logistics
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Restaurants and leisure facilities
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Tourism
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Banking and insurance
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Medical services
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Legal services
The quaternary sector
This sector is always the last to emerge in the economy due to the development of the three previous sectors and the increase in the population's well-being. This sector encompasses all companies whose operations revolve around knowledge, including its extraction, application, processing, and generation. In simpler terms, these businesses span information technology, scientific research, development, consulting, and education. The quaternary sector relies on intellectual activities and plays a crucial role in advancing technology, fostering innovation, and enhancing the efficiency of operations across the other three sectors. In developed countries, the quaternary sector maintains stability and progress.
Therefore, companies included in this sector are involved in one of the following activities:
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Research and development
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IT, FinTech and EdTech
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Education
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Consulting services
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Investments and funds
It is essential to clarify that not all companies in the same sector are competitors. Companies are likely to be competitors only if they are neighbours in the same industry. It is important to clarify how the economic sector differs from an industry. An industry signifies the specific concentration of companies within a given sector rather than the reverse. Industries are subgroups, dividing a sector into narrower categories (even smaller than subsectors). They combine companies that engage in highly similar or closely related business activities. Therefore, Exxon and Chevron will compete against each other since they both produce oil. Still, they will not compete with agricultural companies despite being part of the primary sector.
Description of sectors for investment
Regarding investing, a specialised approach exists for sector classification and organisation. This approach is more intricate, yet it offers convenience from the perspective of making informed financing decisions. Eleven sectors use this approach.
1. Energy
This sector includes natural resources such as oil, gas, and coal (converted into energy and fuel) and the equipment for their extraction and direct conversion. Therefore, in the international market, for example, in the energy sector, the leaders are Exxon Mobil, Royal Dutch Shell, PetroChina and Devon Energy. From an investment point of view, this sector has the lowest yield but the highest dividends - about 4%.
Investing in this sector carries significant risk for investors. Recent influences from environmental and political agendas and volatile commodity prices directly impact share prices. Therefore, the energy sector is an area that can be disregarded by a few unfavourable posts from influential individuals on Twitter, so it is extremely difficult to predict the situation in the energy sector.
2. Materials (raw materials)
This sector includes agricultural materials, plastics, various chemicals, packaging materials, industrial and precious metals, and minerals. It also includes gold mining, which is still relevant. They included Alcoa, Mosaic, WestRock and other companies in the American market.
The sector is cyclical and, therefore, quite stable and predictable. For example, today, we anticipate a surge in demand for eco-friendly materials and biodegradable packaging. Consequently, their prices will likely escalate unless an unforeseen economic crisis occurs. Gold will once more emerge as the quintessential and enduring niche.
3. Industry
This includes the space industry, railway and aircraft construction, maritime transport, cargo transportation and machinery. For instance, Boeing, Danaher, General Electric, and Lockheed Martin are well-known among American companies in this sector.
This sector is also considered cyclical but is highly dependent on the general situation of the market and other sectors, including raw materials and energy. While backed by state support, many industrial companies frequently carry substantial debt burdens. Consequently, investments in this sector are best approached with a long-term perspective.
4. FMCG
This sector includes, for example, alcohol, tobacco, hygiene products, cosmetics, food, drinks, etc. In short, what people need frequently and consistently, regardless of the market and world circumstances. This sector stands out as the most diverse and expansive today. Numerous renowned and prosperous companies, including Walmart, Philip Morris, Tyson Foods, and other prominent chain stores, can be recognised.
Ideally, this sector is considered a "financial safety net, " a protective asset. It is not cyclical; there is stable and rapid growth, and it will never cease to be in demand since people always need to eat and satisfy their basic needs.
5. Selective consumer goods
This sector includes luxury goods, clothing, transportation (cars, motors, bicycles, etc.), hotels, restaurants, beauty salons, art, etc. That is, everything that people buy irregularly and only when their basic needs are fulfilled. Amazon is the preeminent figure in this sector, which has fuelled approximately 400% growth within the past decade. Additionally, notable players in this arena encompass McDonald's and Reebok.
This sector is cyclical and always shows sharp growth after crises when the income and welfare of the population begin to grow. Therefore, investing in this sector can be very profitable, but for a limited time. Amidst a crisis, the profitability of this sector experiences a sharp decline. People become less interested in travelling or acquiring new smartphone models as priorities shift.
6. Healthcare
It is the second largest and fastest growing sector of the modern economy (growth of 270% over the last ten years) after selective consumer goods. This includes all pharmaceuticals (laboratories, drug development, pharmacies), medical equipment suppliers, health insurance, and medical and biotechnologies. Players such as Pfizer and Johnson & Johnson are well-known globally.
The sector is non-cyclical and stable because, just like food, people always need medicine and medical care. Simultaneously, this sector exhibits consistent expansion driven by overall technological advancements. These innovations also foster the emergence of novel biotechnologies, medications, equipment, and patents. Therefore, the shares of biotechnology companies are the most volatile and promising for modern investment.
7. Finance
This is the traditional banking sector, including stock markets, brokerage agencies, insurance companies, etc. The largest in the American market are, for example, Mastercard, JPMorgan and Visa.
Currently, the payment systems subsector holds particular allure due to its active development, fuelled in part by the rising popularity of cryptocurrencies. Although relatively young, this subsector is notably intricate. However, this sector is highly dependent on the global market and the general state of the country's economy, as well as external factors such as politics or the epidemiological situation.
8. Information technology (IT)
Currently, this sector stands out as the most sought-after area for investment. Its appeal lies in several factors, including rapid development and diverse products actively used by other sectors, which include software, mobile applications, smartphones, the Internet, gadgets, video cards, etc. The companies Apple, Microsoft, Intel, and Nvidia have demonstrated their effectiveness on the global stage.
This sector is considered extremely profitable on the S&P 500 index, although it is associated with specific risks. Therefore, the industry is fiercely competitive, and companies rely heavily on innovation and meeting the needs of their target audience. If a company begins to lag technologically, the shares of this company will decline.
9. Communication services
This sector includes video games, media, communications services, interactive media and social networks, and online cinemas. It is considered the youngest among the sectors on the S&P 500 index (it was entered only in 2018) but is the fastest growing. We can highlight companies such as Google, Facebook, and Netflix.
This industry holds particular allure for content creators and advertisers, rendering it a cyclic and promising stock investment.
10. Utilities
This sector includes all those resources supplied to private individuals, such as gas, water, and electricity. It includes NextEra Energy and Consolidated Edison companies in the international market.
This is one of the most traditional and unpopular sectors with limited development rates and opportunities. However, it is largely immune to external factors and crises, making it an appealing option for "protective" investments.
11. Real estate
This sector includes residential, industrial, and commercial real estate, rental, management, and construction. American Tower, REIT, and Welltower are the most famous companies in the US. The sector is considered low-yield and traditional but attractive in terms of dividends.
Comprehending the various economic sectors holds immense significance when constructing an investment portfolio. By analysing the economic indicators specific to each sector, you can mitigate numerous financial risks and strategically enhance the profitability of your portfolio. It also provides more accurate and detailed insights into how the economy is performing and which sectors are growing faster and more efficiently than others. For individuals seeking to invest in a particular sector, specialised exchange-traded funds known as sector funds (ETFs) provide an immediate solution. These funds offer pre-constructed baskets of shares or securities from specific industries or sectors. For example, the energy basket will simultaneously include shares of several oil and gas enterprises. This makes investing not only easier but also safer. You can also learn about the basics of investing and independent portfolio diversification in the "Investing in the Market" course.
