Stock Market Content - Why is Stock Market Content Classified in Sectors and Industries?
Classification of stock market content in sectors and industries helps you analyzing stocks, since it only makes sense to compare stocks within each sector or industry.
The most often used classification of stock market content is to group stocks in sectors and industries. This is especially important when analyzing stocks; it only makes sense to compare stocks within each sector or industry.
Many people are confused in using the terms industry and sector and they often mix them. Both terms have similar meaning, they describe a group of companies that operate in the same segment of the economy or share a similar business type. The only difference between these two terms is in their scope; while the term sector refers to a large segment of the economy, the term industry describes a much more specific group of companies within specific sector. For example, the financial sector can be broken down into industries such as Banks, Insurance, Real Estates and Diversified Financials.
It should be noted that you may find situations in which these two terms are reversed, like with Industry Classification Benchmark (ICB) for example.
Importance of Stock Market Content Classification for Investors
Thomson Reuters Business Classification (TRBC) Structure
Stock market content is classified in economic sectors, business sectors, industry groups and industries.
When analyzing stocks, one of the most often used fundamental approaches is to compare financial ratios among different companies and trying to find undervalued stocks and put them on the list of buying opportunities. Everything is fine with this, but it only makes sense to compare apples with apples and pears with pears, while comparing apples and pears could lead you to erroneous conclusions.
For example, comparing price to earnings ratio (P/E) between Ford (at the time of writing 7.27) and Google (at the time of writing 21.62) doesn't tell you anything about which stock is most likely undervalued. But comparing Ford P/E to Toyota P/E (at the time of writing 50.18) makes sense and looking solely to this ration Ford stocks looks cheaper then Toyota stock; of course, before making final investment decision you have to analyze further, you never make decision based only on one ratio!!!
Different Standards and Classifications
Many different industry classification standards exists and while surfing the web financial portals you will see that stock market content is not classified exactly in the same groups and levels; there are minor differences among them.
You will mostly find one of the following three classifications in global financial community: Thomson Reuters Business Classification (TRBC), Global Industry Classification Standard (GICS) developed by Morgan Stanley Capital International (MSCI) and Standard & Poor's (S&P) or Industry Classification Benchmark (ICB), a classification structure maintained by Dow Jones Indexes and FTSE Group.
The Thomson Reuters Business Classification (TRBC) is an industry classification of global companies; it is owned and operated by Thomson Reuters and is also the basis for Thomson Reuters Indices. TRBC uses 4 level classification: Economic Sector, Business Sector, Industry Group, Industry.
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