Investment Classifications: From a Financial Advisor
Creating an effective investment portfolio starts with understanding the classification systems used to group and evaluate the thousands of publicly traded companies available for investment. These systems organize businesses into categories to enable meaningful comparisons and performance analysis.
While different frameworks exist, they all aim to group companies with similar characteristics. The accuracy and relevance of these systems depend on how well they adapt to new trends and changes in the market. Regular updates ensure they remain aligned with the evolving economic landscape. A clear, globally consistent framework is indispensable for industry analysis in the financial world.
Key Definitions
Industries and sectors serve as the foundation for analyzing economies and markets. Companies are categorized into industries based on their primary line of business. Related industries are grouped into broader sectors, offering a hierarchy from broad to specific classifications. Sectors encompass general economic categories—typically around a dozen in most systems—while industries and subindustries provide more granular distinctions.
For example, the healthcare sector includes industries such as pharmaceuticals, medical devices, and care providers. Each one can be further divided into subindustries for more detailed analysis. These distinctions help economists and financial analysts alike, forming the backbone of research, portfolio design, and asset allocation.
Common Questions
How are companies classified into sectors and industries?
Companies are assigned to an industry based on their primary business activity, typically measured by revenue. Diversified companies are classified based on the segment generating the majority of their revenue or reflecting their core operations.
Do government and financial markets use the same classification systems?
No, government statistics and financial markets use different systems, though they often overlap. For instance:
● North American Industry Classification System (NAICS): Adopted for government reporting in 1997, replacing the older Standard Industrial Classification (SIC) system.
● Global Industry Classification Standard (GICS) was created by MSCI and S&P in 1999. It is used worldwide in finance and is popular in the investment community.
Other systems, like the FTSE Industry Classification Benchmark (ICB) and Thomson Reuters Business Classification (TRBC), are used too. They help with specific indexes and analyses.
How many sectors and industries exist?
The number varies by system. Broader categories may group food and drinks together.
More specific categories can separate them into different industries. They can also distinguish between subcategories, like craft beers and mainstream drinks. The level of detail depends on why the classification is being done. It could be for general economic tracking or for specific investment research.
By using these frameworks, investors get important insights into economic trends and market opportunities. This helps them make smart decisions and build strong portfolios.
Sources:
https://www.fidelity.com/learning-center/search-results/?q=what%20are%20sectors
Disclosures:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
