A sector is simply a grouping of companies that have similar businesses. The grouping is done be exchanges or the compilers of indices.
Most sectors group together companies within a particular industry such as telecoms and oil. Some are more varied. The FTSE Support Services sector verges on being a catch-all for companies that do not fit elsewhere.
Sector classifications are useful for several reasons:
- They enable investors to analyse their exposure to different industries. This also means it is easy to analyse exposure to categories of sector, such as cyclical sectors.
- Sector indices provide benchmarks for specialist funds that only invest in certain sectors.
- Communication: they help funds, analysts and others to describe their speciality in a clear way.
- They provide a peer group with which to compare a company - for example, when comparing a company's PE to the sector PE.
There are a number of different sector classifications, but by far the most widely used in the UK is the FTSE classification. FTSE Sectors are also grouped into industry groups (such as "cyclical services"), and further divided into sub-sectors.