The companies listed on the stock markets can be grouped together based on their primary business activities. The companies are grouped into 10 broad groups and each broad group is further split into sub-groups and then further split into more sub-groups. The broad group is often referred to as a sector (which can be thought of as a section of the business economy). These broad groups or sectors are further divided into sub-groups which are often referred to as industries. The terms ‘Sector’ and ‘Industry’ are frequently reversed and unfortunately there are several standard classification systems that are used.
The advantage of grouping together companies of a similar business nature is that the stock investor can easily compare the financial strength of a company with the financial strength of its competitors. The investor can also compare the stock price performance of a company to that of its competitors. In addition, there are indices constructed for various sectors and industries which allows the investor to determine a stocks performance relative to the sector or industry overall performance.
There are numerous standard grouping classifications used within the U.S. stock markets. The three main classifications commonly used are ICB, GICS and TRBC. These three are very similar to each other. While there are other classifications, they tend to be more used by economists rather than stock market analysts.
Industry Classifications:
- The Industry Classification Benchmark (ICB) was developed by Dow Jones & Company, Inc. and the FTSE International group. The ICB classification groups companies into 10 broad groups which the ICB refers to as Industries. The Industries are further divided into 20 groups referred to as Supersectors. The Supersectors are divided into 41 Sectors and then further divided into 114 Subsectors.
- The Global Industry Classification Standard (GICS) was developed by MSCI inc. (Morgan Stanley Capital International) and Standard & Poor’s (S&P). The GICS classification groups companies into 10 broad groups which the GICS refers to as Sectors. The Sectors are further divided into 24 sub-groups referred to as Industry groups. The Industry groups are divided into 68 Industries and then further divided into 154 sub-Industries.
- The Thomson Reuters Business Classification (TRBC) was developed by Thomson Reuters. The TRBC classification groups companies into 10 broad groups which the TRBC refers to as Economic sectors. The Economic sectors are further divided into 25 sub-groups referred to as Business sectors. The Business sectors are divided into 52 Industry groups and then further divided into 124 Industries.
The terms sector and industry have different meanings for grouping with the GICS and ICB classifications. Also, the TRBC classification uses the term Industry group at a different sub-group level to GICS.
The sector and industry group terminology used by GICS tends to be the more common reference cited by the financial press and is the reference used throughout this website. Although there is a lot of reference to the ICB classification system which is used by NYSE, it is common for the financial press to cite the GICS terminology. This means that the broad grouping of the 10 main groups is more commonly referred to as sectors rather than industries.
The 10 main sector groups for the ICB, GICS and the TRBC classification systems are shown below in Table 1.
Table 1. ICB, GICS and TRBC sectors
Note that the ICB classification refers to sectors as Industries.
Other industry classifications used within the U.S. economy are the Standard Industrial Classification (SIC) and the North American Industry Classification System (NAICS). In additional, some financial companies serving the stock market industry come up with their own versions for the sectors and sub-groups.
Irrespective of the exact categories used for the sectors and sub-groups, the primary purpose of classifications is to simplify the analysis of the financials and the stock price performance of listed companies.
A common valuation approach is to compare the earnings of a company with the earnings of its direct competitors. For example, a car manufacturer and a grocery chain store both sell to consumers and are both retail companies. However, they cannot be directly compared to each other as they sell completely different products. By sub-grouping car manufactures together, an investor can analyze one car manufacturer directly against other car manufactures and can also establish an industry average.
Thus it is convenient to group all of these competing companies into single sub-categories. This allows for the earnings to be averaged and compared to each company within the group. Similarly, an index of the stock prices can be established for the sub-group allowing an investor to determine the performance of individual stocks against the average for the sub-group and also relative to each stock in the sub-group.