Stocks-investing is an intimidating topic for some, with its technical jargon and complicated formulas. Even seasoned investors themselves can find the stock market tricky sometimes. After all, its movement is impossible to predict, and its surprises aren’t always good.
But despite that, the benefits of investing in stocks will never change. Even during a recession, some stocks can retain their values and prove profitable. Such stocks are called counter-cyclical stocks, and they tend to perform well during a recession because the demand for them rises when incomes decline.
Again, it’s another daunting financial term, but the stock market doesn’t really have to be unapproachable. If you’re starting to explore stock-investing in 2021, this article will give you a simple guide on the best sectors to look into.
Why Invest in Stocks?
Firstly, let’s discuss a few reasons to invest in stocks. Many people have misconceptions about the stock market, such as only the rich can invest in it. But in fact, you don’t need thousands of dollars to make your first investment. If you earn a monthly salary, imagine setting aside your budget for iced-coffee or fast-food lunch. You would probably end up saving a thousand bucks every month.
You can put that extra cash into stocks right away. But what happens afterward? When you buy a company’s stocks, you become its part-owner. You will own one, or a fractional share of that company, and start earning dividends. Dividends are the sum that your stocks earn, and they are automatically reinvested in your shares. In turn, those shares will also earn dividends of their own.
Over the years, your stock earnings and holdings can grow at a fast rate, without requiring you to spend more or track your investment.
The Best Sectors to Invest Your Stocks In
When deciding on a sector to invest in, investors look into historical data and make assumptions from there. They would consider how each sector has been performing, analyzing whether the demand for it will remain consistent or grow in time.
Some examples of sectors are healthcare, technology, energy, consumer discretionary, and financials.
Due to the aging population and accelerating innovations in biotechnology, the healthcare industry has been booming. And of course, the pandemic increased the demand for care. As such, the trend of the health industry leading all other industries will likely continue in the future. Healthcare companies include hospitals, institutional services, pharmaceuticals, biomedical firms, and medical instruments suppliers.
The healthcare industry still performs relatively well when other industries are declining. That’s because people continue to consume medicine, vitamins, or supplements no matter the economic state. Hence, the healthcare industry is considered a “defensive sector.”
As IT companies produce more mobile devices with cutting-edge smart features, the technology sector’s stocks will remain at the top. Tech sectors include computer manufacturers, computer software providers, electronics companies, and technological service companies.
The energy sector is composed of well-established oil investment companies and renewable resources. Though fairly profitable, investing in the energy sector, particularly in the oil and gas industry, comes with a few risks. Oil and gas stocks tend to be more volatile because they are more sensitive to supply and demand changes. Accidents such as oil spills also affect the value of oil and gas stocks.
Nevertheless, the oil and gas sector is attractive for both day traders and long-term investors. The pandemic may have driven energy stocks to all-time lows, but many companies have recovered since.
The consumer discretionary sector is the industries that provide non-essential products and services. It is also called consumer cyclical stocks because the demand for them only rises during a growth period in the economy. It is the opposite of counter-cyclical stocks.
Some examples of consumer discretionary products are high-end electronics, coffee shop beverages, and official pop culture merchandise. Despite their cyclical nature, it’s still good to invest in them because they yield high returns.
The financial sector includes banks, loan providers, insurance companies, and payment services, to name a few. The fastest-growing financial stocks have a year-over-year earnings-per-share (EPS) growth rate of 230.8% to 391.1% for the most recent quarter. Such rising figures indicate that financial companies are growing more money than they can reinvest or return to their stockholders.
Tips for Building Wealth Through Stocks
You can definitely build wealth through stocks. But before deciding to do that, understand that you can’t predict how your stocks will perform, no matter how successful they are at a given time. Stocks change rapidly, sometimes resulting in a crash that occurs due to a double-digit drop in value. Hence, it’s important to diversify your portfolio, having both cyclical and counter-cyclical stocks, and other investment products like bonds. When the stock market is down, bonds tend to go up, and vice-versa.
Simply put, never put your eggs in one basket. Spread it around stocks, bonds, savings accounts, and others. But stocks are one of the investments that’ll give you the best returns.