Industry: Definition in Business and Investing

What Is an Industry?

The term "industry" is a classification for a group of companies that have similar business activities. In modern economies, there are dozens of industry classifications. Industries typically are grouped into larger categories called sectors.

Individual companies are generally assigned to 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 rather than in the financial services industry.

Understanding an Industry

Similar businesses are grouped into industries based on the primary business activities or the primary product that they produce or sell. This creates industry groups, which can then be used to separate businesses from those that participate in different activities.

How Investors Use Industries

Investors and economists often study industries to better understand the factors and limitations of corporate profit growth. Investors often compare companies operating in the same industry to evaluate their relative attractiveness as an investment.

Investors seeking better performing stocks and ETFs often study the best performing industries as well as watch industry rankings for changes. For example, investors might see a red flag where an investment is concerned when they see an industry that's declined in rank.

Special Considerations

Stocks

Stocks within the same industry often rise and fall as a group because the same macroeconomic factors are likely to impact all members of an industry.

These macroeconomic factors can be changes in market sentiment on the part of investors, such as a response to a particular event or piece of news. They can also be changes involving the industry itself, such as new regulations or increased raw material costs.

However, events related to one business in particular can cause the associated stock to rise or fall separately from others within the same industry. This can be the result of events such as a differentiating product release, a corporate scandal in the news, or a change in leadership structures.

Industries vs. Sectors

Sectors and industries are classifications used to group similar types of business operations. However, sectors are broader than industries.

For example, retail trade is a sector as defined by the North American Industry Classification System (NAICS). Within that sector are industries such as health and personal care stores, clothing stores, and shoe stores.

Rite Aid Corp. and Gap Inc. are members of the same consumer goods sector, but each is listed in a different industry based on the products that they produce or sell. Rite Aid Corp. is classified within the health and personal care stores industry (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 this business develops photographs in addition to selling consumer goods, it is assigned multiple NAICS codes (NAICS Code 812921 for its photo department).

The 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, companies that use similar production processes are categorized in the same industry.

Global Industry Classification Standard (GICS)

The Global Industry Classification Standard (GICS) is also a commonly referenced classification system. The GICS assigns every public company to an industry group and economic sector that best define 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 and packaging, metals and mining, and paper and forest products.

The Bottom Line

In business and investing, industry is a classification that is used to group similar companies. These companies have comparable products and services, and will often respond in similar ways to macroeconomic trends. Because of this, their stock prices often move up or down at the same time.

Industries can be further grouped into sectors, which is a broader classification that includes multiple industries. Businesses within the same sector may respond similarly to some macroeconomic trends but not others.

Two common classification systems for industries are the North American Industry Classification System and the Global Industry Classification Standard.