Definition of industry
What is an industry?
An industry is a group of companies that are related on the basis of their main business activities. In modern economies, there are dozens of industry classifications. Sector classifications are generally grouped into larger categories called sectors.
Sole proprietorships are generally classified into an industry based on their largest sources of income. For example, while an automobile manufacturer may have a financing division that contributes 10% of the company’s overall revenues, the company would be classified in the automobile manufacturer industry by most classification systems.
Key points to remember
- Similar businesses are grouped into industries, and there are a number of different industries, such as department stores and shoemakers.
- Industry grouping is based on the main product that a company manufactures and sells. Meanwhile, industries are grouped into sectors.
- The North American Industry Classification System is the standard classification system used by government agencies to organize businesses into sectors or industries.
Understanding an industry
Similar businesses are grouped into industries based on the main product produced or sold. This effectively creates industry groups, which can then be used to isolate companies from those involved in different activities. Investors and economists often study industries to better understand the drivers and limits of corporate profit growth. Companies operating in the same industry can also be compared against each other to assess the relative attractiveness of a business within that industry.
Shares of companies operating in the same industry tend to have similar stock price movements.
Stocks within the same industry often rise and fall in groups 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 news, as well as changes specifically geared towards the specific industry, such as news. regulations or an increase in raw materials. fresh.
However, events related to a single particular company may cause the associated stock to rise or fall separately from others within the same industry. This may be the result of certain events, including a differentiating product release, a corporate scandal in the news, or a change in management structures.
Industries vs. sectors
While sectors and industries are classification systems used to group similar types of business transactions together, sectors are broader than industries.
For example, retail trade is a sector of the North American Industry Classification System (NAICS), and within this 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 industry, but each would be listed in a different industry based on the specifics of the products they make or sell. Rite Aid Corporation is classified in health and personal care stores (NAICS code 4461), while Gap, Inc. is classified in the clothing store industry (NAICS code 4481).
The North American Industry Classification System (NAICS), developed by the United States, Canada and Mexico, is the standard by which government agencies classify businesses when compiling statistical data. In the NAICS hierarchy, businesses that use similar production processes are classified in the same industry.
Global Industrial Classification Standard (GICS)
The Global Industry Classification Standard (GICS) is also a commonly referenced classification system. The GICS assigns to each public company an economic sector and an industrial group which best define its activity. The GICS was jointly developed by Morgan Stanley Capital International (MSCI) and Standard & Poor’s (S&P) in 1999. It was created to be an effective investment tool to capture the breadth, depth and evolution of sectors. industrial. The GICS methodology is used by MSCI indices, investors, analysts and economists to compare and contrast competing companies.
The GICS is a four-level hierarchical industry classification system. According to the GICS hierarchy, there are 11 economic sectors. These sectors are subdivided into 24 industry groups, 69 industries and 158 sub-industries. Each stock has a code to identify it at each of these four levels. For example, “materials” is an economic sector. Within materials, there are different industries: chemicals, building materials, containers and packaging, metals and mining, and paper and forest products.sese