There are thousands of companies listed on the three largest stock exchanges in the United States. While they have their own individual strengths and weaknesses, economists, stock market analysts and others often put them into different industry categories.

Analysts do this because companies in the same industry share many of the same characteristics. For example, if gas prices rise, they are likely to hurt the earnings of not just one airline but airlines as a whole, because all of them use a lot of gas.

By putting companies into industry categories, stock analysts get a better sense of where earnings and possibly the future stock price of different companies are headed. Just as importantly, putting companies into different industry categories allows investors to easily diversify their holdings.

Diversification is important because it helps investors reduce risk. If investor A, for example, only owns the shares of airline stocks, he or she would be hit with a likely drop in the share prices of all of the companies he or she owns if gas prices rise. On the other hand, someone who owns some shares of different airlines and who also own shares of gasoline producers, will likely do better because the gasoline producer is charging higher prices for gas, and so its revenue will increase.

Many academic advisors suggest owning a broad array of stocks in order to diversify risk. Among the industry categories to choose from, including subcategories are:

• Basic Materials - Manufacturers of basic substances that go into finished products. Including chemical manufacturing, containers, forestry and wood products, gold and silver, iron and steel, and paper and paper products
• Capital Goods - This includes large pieces of machinery and construction related items, aerospace and defense, construction and agricultural machinery, construction services
• Conglomerates - Multi-industry corporations, such as GE, Honeywell International, and United Technologies
• Consumer Cyclical - Apparel and accessories, appliances, tools, footwear, furniture and fixtures, recreational products
• Consumer Non-Cyclical - Consumer goods bought on a regular basis: beverages, office supplies, food, personal and household products, and tobacco
• Energy - Coal, oil, gas, oil well services and equipment
• Financial - Consumer financial services, insurance, investment services and banks
• Healthcare - Biotechnology, drugs, healthcare facilities, medical equipment and supplies
• Services - Advertising, broadcast and cable TV, films hotel and motels printing real estate, restaurants, retail, schools
• Technology - High-tech and computer related companies, communication equipment, electronic instruments, controls, semiconductors, and software and programming
• Transportation - Air and sea transportation, railroads, and trucking
• Utilities - Electric, natural gas, water

Academic studies have shown that you can achieve enough diversification with as few as nine or 10 stocks in different industries but many financial advisors suggest upwards of 15 to 20. Of course, mutual funds often invest in hundreds or thousands of different companies providing the most diversification, assuming that the fund invests in all market sectors. Advisors suggest that you don't invest in an industry and company you don't understand and stick to investments you do understand, including those you may be familiar with in your daily life.

Regardless of what you invest in, make sure that is a part of a well-diversified portfolio across many industry sectors.