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Artificial Intelligence and Industry Classifications

November 20. 2017. 6 mins read

In the world of stock investing, we can look at all the world’s stocks as a big basket or universe of all available stocks to choose from. We can then start to slice and dice the basket into categories like country, industry, and size. Finance people call these “factors”, and what investors have noticed since as far back as the 1930s is that stocks that fall within a particular factor tend to behave similarly. You may have noticed examples of this happening before, such as when Intel (NASDAQ:INTC) reports strong earnings and all the other chipmakers see a bump in their stock prices as a result. The key takeaway here is that stocks within a particular industry tend to behave similarly. So how can we tell which stocks fall within which industries? It turns out that there are particular industry classifications that a designated authority ascribes to stocks. Perhaps the most popular classification method is known as GICS (Global Industry Classification Standard).

GICS is quite a useful concept to understand for retail investors. It simply consists of a hierarchy that starts at the top with sectors we’re probably all familiar with like Utilities, Consumer Discretionary, or Energy:

Source: MSCI

Under each industry are further classifications at increasing levels of granularity. At the very bottom is the “sub-industry” and it makes sense that each stock will belong to a single “sub-industry”. Since each level is designated by a two-digit code, when you get the bottom, you have an ei

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