How do you measure performance when you're investing in stocks?
The most basic way (and the method employed by many) is noting if the price is higher or lower than your purchase price.
That is certainly an important consideration, however it doesn't tell you the whole picture.
Another and equally important question is: Compared to what?
Here is where stock sectors become important. Stock sectors group companies in the same industry under some broad categories such as transportation, technology, healthcare and so on.
If you own a technology stock, you can compare how it has performed to the industry sector. This tells you how your stock is doing compared to its industry group.
This information is readily available over a number of financial sites. I like the stock sector reports on Yahoo! Finance.
Comparing stocks
You can look at a number of indicators, including price to see how your stock is doing compared to its industry group. However, industry groups are very broad so the comparison to an individual company is somewhat strained.
By clicking on the industry sector, you can see the sub-sectors in each group. For example, under the technology sector, you will find a lengthy list of sub-sectors, such as communication equipment, Internet software & services, wireless communications and so on.
This lets you compare your stock more specifically with a group of similar companies. If you click on a sub-sector, Yahoo gives you a list of the companies that make up the sub-sector.
This lets you confirm you are looking in the correct sub-sectors (your company should be listed) and lets you compare your stock's performance with direct competitors.
With these tools you can answer the "compared to what" question. If your stock is up 10%, that may seem like a good return. However, if its direct competitors are up 25%, you might ask yourself if you own the wrong stock.
If any case, the ability to compare your stock to broad and narrow measurements helps you decide how well it is really performing.
