Pro Investor Academy
Beginner
5 min read

Sectors and Indexes

Sectors group similar businesses; indexes measure groups of companies.

The short answer

A sector groups companies engaged in similar businesses that tend to respond to the same forces at the same time, while an index is a measurement of a defined group of companies, such as the S&P 500, that cannot itself be bought directly. Understanding both is necessary to judge whether a portfolio is genuinely diversified or only appears to be.

What you'll learn

  • Define a sector and explain why sector concentration is a real risk
  • Explain what an index measures and how investors gain exposure to one
  • Compare the construction of the S&P 500, the Nasdaq-100 and the Dow Jones Industrial Average

Optional supplemental lesson. It doesn't count toward the certificate.

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Sectors

Companies are grouped into sectors such as technology, health care, financials, energy, industrials, consumer staples and utilities. Companies in a sector often respond to the same forces at the same time.

This is why sector concentration is a real risk: owning ten companies in one sector is less diversified than it looks.

Indexes

An index is a measurement, not something you can buy. The S&P 500 tracks 500 large U.S. companies weighted by size; the Nasdaq-100 tracks 100 large non-financial Nasdaq companies; the Dow Jones Industrial Average tracks 30 companies weighted by share price.

You gain exposure to an index by buying a fund that tracks it.

Why index construction matters

A market-cap-weighted index, such as the S&P 500, gives its largest companies a disproportionate influence over the index's overall move. A handful of the biggest constituents can dominate the index's return in a given year, which is easy to miss when the index is treated as one simple number.

Why this matters

Indexes are the yardstick everything else gets compared against.

How this connects to Intelligent Accumulation

Understanding sector concentration is part of checking, before adding new money, whether a portfolio is actually diversified or only holds many tickers within the same exposure.

Read the full approach

Terms used in this lesson

Select a term to read its definition.

  • Sector

    A grouping of companies in similar businesses, which often move together.

    View in the glossary
  • Index

    A measurement of a group of investments, such as the S&P 500. An index cannot itself be bought.

    View in the glossary
  • S&P 500

    An index of 500 large U.S. companies weighted by market capitalization.

    View in the glossary
  • Weighting

    How much each holding counts in an index or portfolio — for example by market capitalization, or equally.

    View in the glossary
See the full glossary

Key takeaways

  • Companies in the same sector often move together, which limits diversification
  • An index measures a group of companies; it cannot be purchased directly
  • Market-cap weighting means the largest constituents dominate an index's return

Related concepts

Written by
Pro Investor Academy Research Team
Content type
Educational article
Published
2026-09-13
Last reviewed
2026-09-13

Sources

Stock Splits and BuybacksReading Financial Statements

Educational content only. This lesson is not investment, tax or legal advice and does not recommend buying or selling any specific investment. All investing involves the risk of loss.