Why Sector Study Is Crucial Before Investing in Stock Market ?

Investors tend to underestimate the importance of sector before investing in a stock. They generally concentrate on stocks but forget about the importance of sector. Investors in IT and sugar stocks missed to capitalise on the glorious bull run in 2007. Except in rare instances, even good stocks in bad sectors will underperform while bad stocks in momentum sectors generally outperform due to positive sentiment. Just see how even good commodity stocks are now falling to unreasonable levels. In USA, many waste management stocks are now trading near 1-year highs. 

Investors in power sector got bumper returns in the December, 2007 rally. Textiles are the hot stocks in early 90’s, while IT stocks are the hot ones in late 90’s. Metal stocks are star players in 2007 while they are the worst performers in 2008. When sentiment turns to negative in a sector, even strong fundamentals will not save good companies from free fall.

Why sector is so important?

1. 2001: Nifty gave -16% returns while top sector, Auto, gave 29% returns. Hero Honda was a star in those days.

2. 2002: Nifty gave just 4% returns while top sector, Energy, gave 74% returns and Metals and Banks gave 50% returns. 

3. 2003: Nifty gave 74% returns while top sector, Metals, gave 238% returns. Real Estate and Capital goods gave 170% returns.

4. 2004: Nifty gave just 9% returns but top sector, Real Estate, gave 144% returns. Telecom gave 63% returns.

5. 2005: Nifty gave 36% returns while top sector, Real Estate, gave 290% returns. Capital goods stocks gave 110% returns.

6. 2006: Nifty gave 40% returns but top sector, Real Estate, gave 200% returns. Metals and Telecom gave 70% returns. Unitech and Bharti Airtel investors may not forget those days.

7. 2007: Nifty gave 55% returns while top sector, Metals, gave 190% returns. Capital goods and energy stocks gave 110% returns.

8. 2008: Nifty gave big negative returns but investors in FMCG and Sugar Stocks escaped from big losses.

SO BEFORE INVESTING MAKE STUDY OF EACH SECTOR.....BECAUSE ITS OUR HARD EARNED MONEY