The ASX is home to hundreds of different stocks. Sifting through all of these individual companies can be a Herculean task. As such, investors often find it useful to categorise the rabble of different companies on our markets into ASX sectors.
There are officially 11 different sectors that an ASX share can be classified into. Those 11 sectors are:
Some investors break down these sectors even further. For example, it is common for investors to extract gold stocks from broader materials (or mining) shares, as gold companies tend to dance to the beat of a different drum. But on the whole, these chosen 11 sectors divvy up the ASX quite effectively.
Most investors have a preference for which companies they like to invest in. Today, let's discuss the two that I personally gravitate towards and why.
First up, we have the consumer staples sector. Consumer staples shares are companies that tend to sell goods and services that we need, rather than want, to buy. These include food, drinks, and other household essentials. They also include companies that produce or sell alcohol and tobacco.
The ASX's two most prominent consumer staples shares are Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW). But the likes of Bega Cheese Ltd (ASX: BGA), Endeavour Group Ltd (ASX: EDV), and Metcash Ltd (ASX: MTS) are also popular.
As the name implies, consumer staples companies tend to have highly defensive cash flows and dividends that are relatively protected against cyclical economic problems like inflation and recessions. It's for this reason that I like to invest in these companies at the right prices. In my personal portfolio, you'll find Endeavour, as well as a few US consumer staples stocks like McDonald's, Procter & Gamble, and Coca-Cola.
Information technology shares, or tech stocks for short, are another sector I like to trawl for my next investment. This may be a tad cliched, but it's still my belief that the most innovative, exciting companies on the ASX are currently in this sector. Think of names like TechnologyOne Ltd (ASX: TNE), Xero Ltd (ASX: XRO), WiseTech Global Ltd (ASX: WTC), and Block Inc (ASX: XYZ).
Tech stocks have a unique advantage on the ASX in that they can often scale at rates that are impossible for companies in other sectors. To illustrate, let's take Xero's accounting software. This software might be expensive to develop. But once it's ready for market, it doesn't cost Xero much to sell it.
If the company sells 20% more subscriptions in a given year, its costs of doing business will barely rise, allowing all of that extra revenue to flow straight to the bottom line. Contrast that with, say, a car company, whose costs are directly proportional to how many vehicles it manufactures.
Unfortunately, there aren't too many ASX tech shares in my portfolio at present, as I haven't been able to buy the stocks I'd like to at the right prices lately. However, I do own a few US tech shares, including Microsoft, Alphabet, Duolingo, and Netflix.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.