What Is an Industry?
Let me explain what an industry really is in the world of business and investing. An industry is essentially a classification that groups together companies sharing similar business activities. In today's economies, you'll find dozens of these industry classifications, and they're often bundled into bigger categories we call sectors.
When we assign a company to an industry, we look at its main source of revenue. Take an automobile manufacturer, for example—if it has a financing arm that brings in 10% of revenue, we still classify it in the automaker industry, not financial services, according to most systems.
Understanding an Industry
You need to grasp how industries work to make sense of business groupings. We group similar businesses by their primary activities or products, creating industry groups that separate them from companies doing different things.
As an investor or economist, you should study industries to understand what drives corporate profit growth and its limits. Comparing companies in the same industry helps you gauge their investment appeal. Keep an eye on top-performing industries and shifts in rankings—they can signal opportunities or red flags for your investments.
Special Considerations
Consider this: stocks in the same industry often move together because they face similar macroeconomic factors. Think changes in investor sentiment from news events or industry-specific shifts like new regulations or rising costs.
That said, one company's stock might buck the trend due to unique events—a standout product launch, a scandal, or a leadership change can set it apart from its industry peers.
Industries vs. Sectors
Don't confuse industries with sectors—they're related but different. Sectors are broader classifications that encompass multiple industries. For instance, retail trade is a sector under NAICS, which includes industries like health stores, clothing stores, and shoe stores.
A company like Rite Aid falls into the consumer goods sector but specifically the pharmacies industry, while Gap is in clothing stores. Some companies even span multiple industries or sectors based on their operations. NAICS, used by governments in the US, Canada, and Mexico, categorizes by production processes and gets updated every five years—the latest in 2022.
Then there's GICS, developed by MSCI and S&P Global, which assigns companies to sectors, industry groups, industries, and sub-industries. It breaks down into 11 sectors, 25 industry groups, 74 industries, and 163 sub-industries, helping you compare companies effectively.
Frequently Asked Questions
- What is an example of an industry? Commercial banking is a NAICS industry (code 522110) in the finance and insurance sector, alongside others like credit intermediaries and insurance carriers.
- What is the difference between an industry and a sector? A sector is broader and contains multiple industries; for example, consumer goods is a sector with industries like clothing or personal health.
- What is the difference between an industry and a business? An industry groups similar businesses, while a business is a single entity pursuing specific goals; similar businesses form an industry when they produce comparable outputs.
- How many different industries are there? Classification systems vary, but NAICS groups into about 20 sectors, 100 subsectors, and over 1,000 industry codes.
The Bottom Line
To wrap this up, remember that in business and investing, an industry groups similar companies by products and services, often reacting alike to economic trends. Industries fit into broader sectors, and systems like NAICS and GICS help classify them. Use this knowledge to analyze investments directly—it's a straightforward tool for understanding market dynamics.
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