Industry Definition in Business and Investing

Comments · 63 Views

Individual companies are generally classified into an industry based on their largest sources of revenue. For example, while an automobile manufacturer might have a financing division that contributes 10% to the firm's overall revenues, the company would be classified in the automake

What Is an Industry?

An industry is a group of companies that are related based on their primary business activities. In modern economies, there are dozens of industry classifications. Industry classifications are typically grouped into larger categories called sectors.

Individual companies are generally classified into an industry based on their largest sources of revenue. For example, while an automobile manufacturer might have a financing division that contributes 10% to the firm's overall revenues, the company would be classified in the automaker industry by most classification systems.

Understanding an Industry

Similar businesses are grouped into industries based on the primary product they produce or sell. This creates industry groups, which can then be used to isolate businesses from those who participate in different activities.

Investors and economists often study industries to better understand the factors and limitations of corporate profit growth. Companies operating in the same industry can also be compared to each other to evaluate the relative attractiveness of a company within that industry.

Special Considerations

Stocks within the same industry often rise and fall as a group because the same macroeconomic factors impact all members of an industry. These macroeconomic factors can be changes in market sentiment on the part of investors, such as a response to a particular event or piece of news. They can also be changes directed toward the industry itself, such as new regulations or increased raw material costs.

However, events relating to just one particular business can cause the associated stock to rise or fall separately from others within the same industry. This can be the result of events such as a differentiating product release, a corporate scandal in the news, or a change in leadership structures.

Industries vs. Sectors

Both sectors and industries are classification systems used to group similar types of business operations. However, sectors are broader than industries.

For example, retail trade is a sector within the North American Industry Classification System (NAICS). Within that sector are industries, such as health and personal care stores, clothing stores, and shoe stores. Rite Aid Corporation and Gap, Inc. are members of the same consumer goods sector, but each would be listed in a different industry based on the specifics of the products they produce or sell. Rite Aid Corporation is classified within the health and personal care stores (NAICS Code 44610), while Gap, Inc. is classified within both the clothing stores industry (NAICS Code 448130) and clothing accessories industry (NAICS 448150).23

It's important to note that a single company can reside in two different industries or two different sectors. In addition to being within the consumer goods sector, Rite Aid is considered part of the personal services sector as well within the photofinishing laboratories industry. Because this business develops photographs in addition to selling consumer goods, it is assigned multiple NAICS codes (NAICS Code 812921 for its photo department).

The North American Industry Classification System (NAICS), developed by the United States, Canada, and Mexico, is the standard upon which government agencies classify businesses when compiling statistical data. In the NAICS hierarchy, companies that use similar production processes are categorized in the same industry.

Global Industry Classification Standard (GICS)

The Global Industry Classification Standard (GICS) is also a commonly referenced classification system. GICS assigns every public company to an economic sector and industry group that best defines its business. The GICS was developed jointly by Morgan Stanley Capital International (MSCI) and Standard & Poor's (S&P) in 1999. It was created to be an efficient investment tool to capture the breadth, depth, and evolution of industry sectors. The GICS methodology is used by the MSCI indexes, investors, analysts, and economists to compare and contrast competing companies.6

The GICS is a four-tiered, hierarchical industry classification system. According to the GICS hierarchy, there are 11 economic sectors. These sectors are further divided into 24 industry groups, 69 industries, and 158 sub-industries. Each stock has a code to identify it at all four of these levels. For example, "materials" is an economic sector. Within materials, there are different industries: chemicals, construction materials, containers and packaging, metals and mining, and paper and forest products.7

What Is an Example of an Industry?

The NAICS classified 'Finance and Insurance' as its own top-level sector. Within this sector, there are a variety of groups such as credit intermediaries, financial investment companies, insurance carriers, funds, trusts, and other financial vehicles. A specific NAICS industry is Commercial Banking, and it is assigned its own classification code (522110).1

What Is the Difference Between an Industry and a Sector?

A sector is a broader term than industry. For example, consumer goods is a sector. This sector can then be broken into many different consumables such as clothes or personal health. Therefore, sectors are often further divided into industries that further group similar companies based on an even lower level of detail regarding their products and operations.

What Is the Difference Between an Industry and a Business?

An industry is a broad classification that encompasses multiple businesses. A single business can operate in any industry. When a collection of individual businesses operate in a similar manner and produce similar output, they may be grouped together and classified within the same industry.

How Many Different Industries Are There?

Different classification systems will group and report industries differently. The NAICS has historically grouped companies into roughly 20 sectors, 100 subsectors, and over 1,000 six-digit NAICS industry codes.1

The Bottom Line

In business and investing, industry is a classification term that is used to group broadly similar companies. These companies have similar products and services, and will often respond in similar ways to macroeconomic trends. Because of this, their stock prices often move up or down at the same time. Two common classification systems for industries are the North American Industry Classification System and the Global Industry Classification Standard.

Industries can be further grouped into sectors, which is a broader classification that can include multiple industries. For example, the retail sector can include both the clothing and home goods industries. Businesses within the same sector may respond similarly to some macroeconomic trends but not others.

 

Comments