A utilities sector is an area of an economy based on providing utility services and supportive infrastructure. This includes gas, electric, water, and phone companies, along with companies specializing in providing products and services to these companies, like manufacturers of wiring, transformers, and other components. This market sector is viewed together because the fortunes of utility companies tend to be closely linked, just like those of companies in other sectors like healthcare and technology.
For investors, analysis of the utilities sector can be used to determine if investments should be made in this area, and how they should be distributed. Utilities are typically run under government regulation and they may carry more debt than other kinds of companies to pay for their supportive infrastructure and the other costs associated with meeting regulatory requirements. They may also be limited in terms of how much they can charge customers, presenting a barrier to profits when compared with companies in other industries.
Companies in the utilities sector can be impacted by a number of market fluctuations including changing energy prices, shifts in interest rates, and employment. When energy prices are high, for example, utilities pay more for raw materials they use, and may not be able to pass this immediately on to customers. Understanding the relationship between a utilities sector and other areas of the market is important for people making investment decisions.
Financial performance and projects in this sector can also provide valuable information about the future direction of other areas of the market. Market analysis often breaks down performance by sector to allow people to drill down as they are viewing data and draw more meaningful conclusions about what the market is doing. It is possible for a utilities sector to remain stable when the market fluctuates, or for it to trail the market, earning less than companies in other sectors during upticks in market performance.
Demand for the services of a utility sector can vary, depending on region and time of year, but tends to trend upwards over time. This can make investments in this sector sound from a financial standpoint, as these companies are unlikely to experience radical changes in fortune. With reduced risks usually come fewer opportunities for windfall profits, and the same holds true for investors in utilities. Performance tends to be stable, but not outstanding, and while such companies can be valuable in a portfolio, they are usually balanced with more high return investments.