Industry

Industry

Investopedia / Zoe Hansen

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.

Key Takeaways

  • Similar companies are grouped together into industries, and there are a number of different industries, such as department stores and shoemakers.
  • Industry grouping is based on the primary product that a company makes or sells. Meanwhile, industries are grouped together into sectors.
  • The North American Industry Classification System is the standard classification system used by government agencies to organize companies into sectors or industries.
  • Alternatively, the Global Industry Classification Standard assigned every company an economic sector and industry group.
  • Companies within a similar industry will often perform similarly due to macroeconomic conditions helping or hurting all companies the same across the industry.
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Industry

Understanding an Industry

Similar businesses are grouped into industries based on the primary product produced or sold. This effectively 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.

Stocks of companies operating within the same industry tend to have similar stock price movements. This is due to call companies within a given industry facing the same headwinds, challenges, and broad triumphs.

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 include changes in market sentiment on the part of investors—such as those based on a response to a particular event or piece of news—as well as changes directed specifically towards the specific industry, 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 certain events, including a differentiating product release, a corporate scandal in the news, or a change in leadership structures.

Industries vs. Sectors

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

For example, retail trade is a sector within the North American Industry Classification System (NAICS), and 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).

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 they develop photographs in addition to selling consumer goods, they are assigned multiple NAICS codes (NAICS Code 812921 for their 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.

The NAICS is reviewed and revised every five years, and the latest edition was released in 2022. This latest edition of industry codes best reflects company classifications, especially in industries that have undergone large changes since 2017.

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.

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 & packaging, metals & mining, and paper and forest products.

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).

What Is the Difference Between an Industry and a Sector?

A sector is often a more broad term than industry. In the example above, the sector for both companies was the consumer goods sector. However, this sector can 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 more broad term than often compasses 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, roughly 100 subsectors, and over 1,000 six-digit NAICS industry codes.

Article Sources
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  1. The United States Census Bureau. "North American Industry Classification System."

  2. National Association of Insurance Commissioners. "NAICS Profile Page: Gap Inc."

  3. National Association of Insurance Commissioners. "NAICS Profile Page: Rite Aid Corporation."

  4. United States Census Bureau. "North American Industry Classification System."

  5. Office of Management and Budget. "North American Industry Classification System."

  6. Global Industry Classification Standard. "MSCI Barra: Frequently Asked Questions About GICS," Page 1.

  7. MSCI Inc. "The Global Industry Classification Standard (GICS®)."