Industry and Sector Analysis: Industrial & Materials

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Two closely related and highly touted sectors for investment are that of the industrials and materials. These sectors include companies that deal in larger commercial operations, thus providing lucrative investment opportunities.

Industry Outlook Summary

The industrials and materials sectors are similar, but they differ in a few key ways.

Companies in the materials sector provide products that are in their raw material form. They extract raw materials and make them available to their customers. As such, they deal solely in the supply and creation of products rather than in the offering of services.

Manufactured or extracted products from companies in the materials sector include plastics, paints, aluminum, timber, and fertilizers, to name a few.

The materials sector is divided into five industries: chemicals, construction, containers and packaging, paper and forest products, and metals and mining. Each of the industries have sub-industries.

Raw materials are finite resources. This may lead some to shy away from investing in the materials sector. Once lucrative paper and timber companies, for instance, have had troubles in a world focused on renewable resources and technology. Still, larger companies in this industry control much of the business landscape. They use their influence on the market to purchase larger shares of emerging markets and can thus expand their product reach and demand.

With this control comes the ability to control prices. As raw materials are depleted their cost increases. Larger companies with control over a good share of their industry or sub-industry can be great investments moving forward.

Companies within the industrial sector manufacture and provide products that are manipulated from their original, raw materials state. These can include agricultural machines, military equipment, industrial construction equipment, and transportation equipment. They also provide both sales and services to their markets.

The industrial sector can be divided into three industries: capital goods, transportation, and commercial and professional services. Like the materials sector, there are sub-industries within each of these industries.

The overall outlook for the industrial sector is bright. While part of this is due to the sheer amount of sub-industries and companies in the sector, should you invest in the right companies, there is a lot of room for financial success. If you've ever wanted to dabble in Wall Street investing or living it up in New York, considering adding companies in the industrial sector to your investment portfolio.

Companies in the industrial sector include airlines, delivery services, facility managers, office suppliers, security providers and services, military contractors, and research and consulting firms.

External Influencers

When you consider investing in a company in the materials sector, the big external influencers you will need to pay attention to are supply of particular raw materials and any related regulations, whether currently imposed or those going through legislation.

Mentioned previously was the fact that raw materials are finite resources. There is not a never-ending supply of them. This limits the amount of product that can ever enter the market, influencing the outlook for companies providing them. While some raw materials won't deplete for some time, others are already depleted and growing irrelevant as an emphasis on more renewable goods emerges.

Complimenting the influence of direct supply are the rules, laws, and regulations surrounding the extraction of raw goods. As raw materials are depleted, governments continually look for ways to preserve them for future generations and use. That's why one should always look at what rules and regulations are currently in place or in the works before investing in the materials sector.

The industrial sector, meanwhile, is influenced mainly by the supply of raw materials, the production of new, more renewable products, the reusability of products, and laws and regulations. There is a lot more to consider when making an investment in this sector, but the considerations to make are a good thing, as they pay tribute to just how much potential growth there is within this sector.

One should pay attention to the buying power of companies in this sector, however. Since they do not have direct control over the price of raw goods or other supplies, companies need to have the buying power to survive market fluctuations and decreased supply or cost-intensive demand.

Technology and Associated Risk

The materials sector provides raw materials. They use a variety of technologies to find and extract raw materials and thus rely on the development of efficient methods of extraction. Since they deal with finite resources there is inherent supply risk with them.

This does play into an advantage at times, however, as companies who control a larger portion of raw materials are able to manipulate the market in their favor. They also often are some of the larger companies in the world, having branches of companies in other industries and sectors influencing their investment potential.

The industrials sector produces technologies in multiple industries that span technology, military defense, construction, transportation, and many others. As such, the industrials sector is always bursting with potential. The biggest risk this sector carries is the depletion of raw materials, increased cost of raw materials, and the potential for no innovation that leads to more renewable products.

How to Invest in Industrial and Materials Sectors

The world of investing is broad. You can purchase shares in individual securities, buy a "pool" of trusted securities for decreased risk, hire financial advisors who do the leg work for you, or purchase mutual funds & exchange traded funds.

To get started in the materials sector, you will best be served by looking at some of the larger raw materials companies rather than in a mutual fund or pool of companies in the sector. That is because many of these companies command a large share of their respective markets and offer great potential individually.

The industrial sector, meanwhile, sees investments in mutual funds or ETFs thrive. They are an outstanding way to mitigate risk by diversifying your investment portfolio.

Both the materials sector and industrial sector offer great potential to broaden your investment portfolio. They offer rewarding returns to investment gurus and are a way to secure a reliable financial future.