Markets, Industries, Sectors, Risk

January 10, 2021

Let us talk a little bit about the axis of risk. If you imagine a horizontal line, and on this line, we will mark and label different items across this line, all the way across from left to right. 

all the way to the left, we have what we call markets. This can for example be the European market, the Asian market, the united states market. This is the broad picture, and typically the economy of a country or a continent. That means whatever is going to happen in a certain company or niche, will seldomly affect the overall market. The market is the safest way to put your money, that is park your money. They will most likely not lose any value, but they will also not gain any profits. Markets are usually slow. 

When we move one step to the right, we will label “Sectors” on our line.  

A sector is describing a large segment of the economy in a market.  

Sectors are for example the finance sector, Agriculture, natural resources, or technology.   

To understand what a sector is, you can think of: primary, secondary, tertiary, and quaternary sectors.  

Oakey, what we do is that we can chunk the market up into sectors, and each sector can be divided into industries. With industries, we move another step to the right on our axis.  

As we move to the right, we increase the risk. If you put your money in a market (that is all the way to the left on the line we have drawn in our imagination), your money will most likely not move. Markets are slow. This is a safe place to park your money. 

With sectors however, you look at investments in which their fundamentals are affected by market factors in the same way. This goes for industries as well, especially industries, which are the label we put on the line as we take another step to the right. 

An industry is like a niche within the sector. Within the financial sector, you can have banks and insurance. Within the medical sector, you can have the industries of research and development, medicine production, pharmaceutical industry, etc.  

Since we are talking about a specific sector or industry, you are getting closer to the root cause of events. That means we have more and thus more volatility. That is more movement in the price of what we are looking at. 

It means that every companies move up and down all the time. All the movement of all companies in the same sector will create a certain trend, and there will be some ups and downs cancelling each other, performing a trend that is more stable than certain company 

Then you can take all the industries within a sector. All the different industries will move have different price development. There will be ups and downs, forming a trend across the sector that is moving even more slowly.  

Then, all the sectors together will form the trend of a market.  

There is one more label that we must put in on the line. That is individual companies. This is all the way to the right. When we invest in specific companies, we have higher risk than investing in a market. However, with higher risk, we also have potential for more profits. With a disciplined manner and with a proven strategy, the risk is actually not that big. 

https://www.youtube.com/watch?v=h_ mJQ8Tw2Gw

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