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What is an 'Industry'

An industry is a classification that refers to groups of companies that are related based on their primary business activities. In modern economies, there are dozens of industry classifications, which are typically grouped into larger categories called sectors, with individual companies being classified into an industry based on their largest sources of revenue. While an automobile manufacturer might have a financing division, contributing 10% to overall revenues, the company is still classified as an auto maker for attribution purposes.

BREAKING DOWN 'Industry'

Industries group like businesses based on the primary product produced and can be used to isolate businesses from those who participate in different activities. Investors and economists often study the industries associated with businesses to better understand the factors and limitations to 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.

Sectors and Industries

While both sectors and industries are classification systems used to group like business operations, sectors are seen as broader definitions that those assigned by industries. For example, both Nike Inc. and the Target Corporation are members of the same sector based on their participation in the consumer goods market, but each would be listed in a different industry based on the specifics of the products they provide. Nike Inc. is classified within the rubber and plastics footwear industry (NAICS Code 3021) while Target Corporation is classified within the department stores industry (NAICS Code 45211).

Stock Movement and Industry

Stocks within the same industry often rise and fall as a group because the same overlying factors exist for all members. This 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 industry. This can be the result of events including, but not limited to, a differentiating product release, a corporate scandal in the news or a change in leadership structures.

The North American Industry Classification System

The North American Industry Classification System (NAICS), developed by the United States, Canada and Mexico, is widely used by investors to classify companies and 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.

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