What is the 'North American Industry Classification System - NAICS'?

The North American Industry Classification System is a business-classification system developed through a partnership among the United States, Mexico and Canada. This classification system facilitates the comparison of statistics of all business activities across North America. Companies are classified and separated into industries that are defined by the same or similar production processes.

BREAKING DOWN 'North American Industry Classification System - NAICS'

The NAICS was established to replace and modernize the U.S. Standard Industrial Classification system. The new system enables easier comparison of all countries in North America. To ensure the NAICS continues to be relevant, there is a planned system review every five years.

The History of the NAICS

The NAICS is a collaborative effort. The three parties responsible for the formation and continued maintenance of the NAICS are the Instituto Nacional de Estadistica y Geografia in Mexico, Statistics Canada and the United States Office of Management and Budget through its Economic Classification Policy Committee and staffed by the Bureau of Economic Analysis, Bureau of Labor Statistics and the Census Bureau.

The first version of the classification system was released in 1997. A revision in 2002 included substantial changes to the construction, wholesale trade, retail trade and information sectors. In 2012, there was a slight reduction in the number of industries in the system and made modifications to some of the system’s sector classifications. The latest revision, which occurred in 2017, reduced the number of industries from 1,065 to 1,057. Changes in size standards were also included in the revision with nine industries affected.

NAICS Coding System

The NAICS classification system allows for more flexibility than the four-digit structure of the SIC. It uses a hierarchical six-digit coding system, classifying all economic activity into 20 different industry sectors. Five of these sectors are primarily those that produce goods while the remaining 15 sectors provide some type of service. Every company receives a primary NAICS code, indicating its main line of business. This primary code is determined by the code definition that generates the largest revenue for a company at a specified location in the past year.

NAICS codes are narrowed from 20 sector codes into 99 three-digit subsector codes, further divided into 312 four-digit industry codes, subdivided into 713 five-digit industry codes and ultimately broken down into 1,066 six-digit NAICS codes.

Reading an NAICS Code

The first two digits of an NAICS code indicate the largest business sector in which a company operates. The third digit designates the company’s subsector and the fourth digit indicates the industry group to which the company belongs. The fifth digit of the code reflects the company’s particular industry of operation. The sixth and final digit designates the company’s specific national industry. Soybean farming, for example, has the NAICS code 111110, which is broken down to sector 11, subsector 111, industry group 1111, industry 11111, NAICS code 111110.

RELATED TERMS
  1. North American Free Trade Agreement ...

    The North American Free Trade Agreement was implemented in 1994 ...
  2. Industry Bet

    A strategy whereby investors or portfolio managers increase or ...
  3. National Association of Insurance ...

    National Association of Insurance Commissioners (NAIC) is a national ...
  4. Global Industry Classification ...

    The Global Industry Classification Standard - GICS is a standardized ...
  5. Diversification Acquisition

    Diversification acquisition occurs when a company takes a controlling ...
  6. Industry Classification Benchmark ...

    A company-classification system for stocks developed by Dow Jones ...
Related Articles
  1. Insights

    SIC Vs. NAIC -An Introduction To Industry Classification Codes

    Standard Industrial Classification (SIC) Codes and the more recent NAICS codes are crucial to classifying data to measure industrial growth.
  2. Managing Wealth

    How ‘Small’ Is a Small Business: The Statistics

    Doing the math will help you determine if you qualify as a small business and when your business gets too big to be small. Turn to the SBA for help.
  3. Investing

    Benefit From A Winning Investment Club

    Joining an investment club isn't a get-rich-quick scheme, but it can help you learn the ropes or sharpen your investing skills.
  4. Insights

    Inside National Payment Systems

    Investopedia explains: The global interconnection of U.S. payment systems makes commerical and financial transfers possible.
  5. Trading

    Trading Systems: Run With The Herd Or Be A Lone Wolf?

    Find out if taking the path less traveled will work in your favor - or against it.
  6. Investing

    How Japan's Stewardship Code Works

    The new stewardship code in Japan aims to improve corporate governance. Will this voluntary code help beneficiaries of company pension funds as intended?
  7. Personal Finance

    A Day In The Life Of A System Trader

    Systems traders divide their time between trading, developing, backtesting, optimizing and forward testing, to create viable and high-probability trading systems.
  8. Taxes

    Why The Complex U.S. Tax Code Won't Be Simplified

    The tax code is 5296 pages long, and it still hasn't been abridged by Congress. Find out why.
RELATED FAQS
  1. What is the average price-to-earnings ratio in the Internet sector?

    Learn what the average price-to-earnings ratio, or P/E ratio, is for companies in the Internet sector and how the sector ... Read Answer >>
  2. What other sectors are most similar to banking?

    Learn valuable information about the many different subsectors in the financial services sector that most closely resemble ... Read Answer >>
  3. What risks do I face when investing in the insurance sector?

    Read about the unique challenges faced by insurers, and learn how those challenges manifest themselves as risks for equity ... Read Answer >>
Hot Definitions
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  2. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  3. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  4. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  5. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  6. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
Trading Center