Industry vs. Sector: An Overview
Although they may seem the same, the terms industry and sector have slightly different meanings. Industry refers to a much more specific group of companies or businesses, while the term sector describes a large segment of the economy.
The terms industry and sector are often used interchangeably to describe a group of companies that operate in the same segment of the economy or share a similar business type. The term sector often refers to a larger, general part of the economy, while the word industry is much more specific.
These two terms are sometimes reversed. But the general idea remains: one breaks the economy down into a few general segments while the other further categorizes those into more specific business activities. In the stock market, the generally accepted terminology cites a sector as a broad classification and an industry as a more specific one.
- The term industry refers to a series of companies that operate in a similar business sphere, and its categorization is more narrow.
- Sector refers to a part of the economy in which a great number of companies can be categorized and is larger in comparison.
- Investors can easily compare companies within the same industry for investment opportunities.
- Stocks of companies in the same industry will usually trade in the same direction, as their fundamentals are affected by market factors in the same way.
- There are four different sectors in the economy: primary, secondary, tertiary, and quaternary.
What's The Difference Between Industry And Sector?
Industry refers to a specific group of companies that operate in a similar business sphere. Essentially, industries are created by breaking down sectors into more defined groupings. Therefore, these companies are divided into more specific groups than sectors. Each of the dozen or so sectors will have a varying number of industries, but it can be in the hundreds.
The financial sector can be broken down into several different industries such as banks, asset management companies, life insurance companies, or brokerages. The companies that fall into the same industry compete for customers by offering similar services. For instance, banks will compete with one another for customers opening up checking and savings accounts, while asset management firms seek investment clients.
But that's not all. These industries can be further categorized into more specific groups. For example, the insurance industry can be broken up into different, specialized divisions like home, auto, life, malpractice, and corporate insurance.
When choosing an investment opportunity, an investor may find it easier to compare different companies within the same industry. That's because they may share the same production processes, cater to the same customer base, or have similar financial statements.
The North American Industry Classification System (NAICS) allows for the easy comparison of statistics of business activity across North America.
The stocks of companies within the same industry will typically trade in the same direction. That's because the companies in the same industry are affected by the same (or similar) factors. So healthcare stocks may be affected in the same way when decisions about the Affordable Care Act (ACA) are made in Washington, D.C., for instance.
A sector is one of a few general segments in the economy within which a large group of companies can be categorized. An economy can be broken down into about a dozen sectors, which can describe nearly all of the business activity in that economy. Economists can conduct a deeper analysis of the economy by looking at each individual sector.
There are four different sectors in an economy:
- Primary Sector: This sector deals with the extraction and harvesting of natural resources such as agriculture and mining.
- Secondary Sector: This sector comprises construction, manufacturing, and processing. Basically, this sector comprises industries that relate to the production of finished goods from raw materials.
- Tertiary Sector: Retailers, entertainment, and financial companies make up this sector. These companies provide services to consumers.
- Quaternary Sector: The final sector deals with knowledge or intellectual pursuits including research and development (R&D), business, consulting services, and education.
For example, the economy's basic materials sector includes companies that deal with the exploration, processing, and selling of basic materials such as gold, silver, or aluminum. These materials are used by other sectors of the economy. Sectors often have specific exchange traded funds (ETFs) that track the sector, such as the Energy Select Sector SPDR Fund. Transportation is another sector of the economy. This sector includes automobile manufacturing, train, trucking, and airline industries.
Investors can use sectors as a way to categorize the stocks in which they invest, such as telecommunications, transport, healthcare, and financials. Each sector comes with its own characteristics and risks.
When evaluating companies, it is most prudent to evaluate companies within an industry as opposed to companies within a sector. This is so, because as noted above, each sector can be broken down into different industries. For example, the airline sector will include companies that build planes, such as Boeing and Airbus, airline companies that actually operate the planes and move customers from one destination to another, food companies that are focused on providing the onboard meals, and so on.
Though all of these companies are in the airline sector and will be affected if the overall sector improves or suffers losses, they have completely different capital expenditures, cash flows, operating margins, and so on. Therefore, when utilizing financial ratios to compare one company to the next, it needs to be in the same industry, for example comparing Boeing to Airbus as opposed to comparing Boeing to an onboard meal provider, to ensure an apples-to-apples comparison.