All you want to know but never asked about the stocks and options markets.

sábado, 10 de enero de 2015

Market sector investment

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In this case the investor invests in a sector as a whole, either through a mutual fund, an ETF or buying a portfolio of shares of all companies, or at least the most representative firms, as appropriate.

To this end, the investor must analyze the sector as a whole, considering the main variables that affect the behavior of this sector if the fundamental analysis is used or analyzing price charts (candlestick or bar charts) when technical analysis is usded. It is always possible and desirable to combine these tools.

If the technical analysis and their tools are used, such as japanese candlesticks, the study is to analyze price charts for the sectoral index in question just as you would do with a chart of a single stock, commodity, etc. 

From the point of view of fundamental analysis the goal is to determine whether the activity in this sector will have a good performance in the future or not by analyzing the whole sector, not the companies that compose it individually.

For example, if an investor considers the oil sector, then he or she study the current extraction capacity and in the world, expectations for oil consumption in the future, the installed capacity of refineries (if there is overcapacity or not, costs to increase it, etc.), refining margins, etc.

In the construction sector the investors could analize the developments in cement production, the country's infrastructure plans, the needs of homes, offices, highways, etc. 

If after these studies the results show  that the coming years will be good for the oil sector, construction, energy, insurance, etc. but the investor does not want to invest only in a company or a few companies because as he does not know which of all firms in the sector will benefit more from that situation, then is a good idea to consider other investment options. Therefore, one possibility is to buy all companies in the sector,or a good representation of them, through a fund, ETF or stock portfolio.

In this form of investing there is a large concentration of risk because if the analysis is wrong and industry behaves contrary to forecast in the future it is likely that all the stocks that make up the fund, index or portfolio will move against the investor.

 

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