The Standard Industrial Classification (SIC) codes are numerical codes assigned by the US government to classify different industries and economic sectors. As an investor, understanding SIC codes can provide useful insights into companies and help make more informed investment decisions.
SIC codes categorize companies based on their primary business activities into major industry groups, industry groups, industries and detailed industry classifications. The codes provide a standardized system to analyze and compare companies across different sectors.
In investment analysis and research, SIC codes serve several important functions related to screening stocks, analyzing financial ratios, identifying peer groups, assessing industry trends and risks, and guiding sector allocation decisions.
Definition and Hierarchy of SIC Code System
The SIC code system was created by the US government and later adopted by other countries globally. It arranges economic data into a hierarchical structure for statistical analysis.
At the top level, there are 10 major industry groups differentiated by the first digit – sectors like manufacturing, transportation, finance, services etc. These are further divided into about 100 industry groups denoted by two digits.
Three digit codes represent specific industries that businesses operate in. Four digit codes provide even more granular categories differentiating business activities. Additional digits can be used to classify sub-industries in detail.
Key Contents and Structure of SIC Code PDFs
SIC manuals and PDF publications outline the industry classification framework in a systematic manner. They provide detailed descriptions and examples of the businesses that fall under every code category.
Investors can leverage these to accurately identify SIC codes for any company based on their primary operations. The manuals also help map companies to peer groups within an industry for comparison.
Applications of SIC Codes in Investment Analysis
Some key applications of SIC codes in investment research and analysis include:
– Screening stocks by industry groups of interest like technology, healthcare, consumer sectors etc.
– Comparing financial ratios like valuation multiples, profitability margins, leverage across peer companies in an industry classification.
– Assessing market risks, growth trends and outlook tied to different sectors of the economy.
– Constructing industry-based equity portfolios and guiding tactical allocation to desired sectors.
In summary, SIC codes categorize companies into standardized industry classifications. Understanding these codes and mapping companies to peer groups provides useful investment insights. Investors can leverage SIC codes for multiple applications like stock screening, ratio analysis, risk evaluation and portfolio allocation decisions.