What is a 'Peer Group'
A peer group is a group of individuals or entities who share similar characteristics and interests. Peer groups, in the case of people, have characteristics which include similarities such as socio-economic status, level of education, and ethnic background and so on amongst its individual members.
In the context of financial markets, peer group usually refers to companies that operate in the same industry sector and are of similar size.
BREAKING DOWN 'Peer Group'
In investment research, peer group analysis is a vital part of establishing a valuation for a particular stock. The emphasis here is on comparing "apples to apples," which means that the constituents of the peer group should be fairly similar to the company being researched, particularly in terms of their main areas of business and market capitalization.
Peer group analysis can enable investors to spot valuation anomalies for a specific stock. For example, a stock that is trading at an earnings multiple of 15 – compared with an average multiple of 10 for its peer group – could justifiably be considered to be overvalued.