Introduction
An industry is a group of companies that are related based on their primary business activities. Industries are essential to modern economies, as they help categorize and standardize the vast array of business activities into more manageable groups. Individual companies are classified into industries based on their largest sources of revenue. For instance, an automobile manufacturer that also has a financing division would still be classified into the automaker industry if the majority of its revenue is derived from auto manufacturing.
Key Points
- Industry Classifications: Similar companies are grouped into industries based on their primary line of business. These industries are further categorized into larger groups called sectors.
- Revenue Sources: Companies are classified into industries primarily based on their main products or services.
- Standard Classification: The North American Industry Classification System (NAICS) is often used by government agencies for classification. Another popular system is the Global Industry Classification Standard (GICS).
- Macroeconomic Conditions: Industries collectively feel the impact of macroeconomic factors, which can cause companies within the same industry to have correlated stock price movements.
A Deeper Look into Industry Classification
Similar businesses are grouped into industries based on their primary product or service. This helps in isolating businesses performing different activities, aiding investors and economists in their analyses. Stocks of companies in the same industry usually show similar movements due to shared economic challenges and opportunities.
Special Considerations
Stock prices of companies within the same industry often rise and fall together due to macroeconomic conditions. This can include aspects like market sentiment or regulatory changes. However, unique events affecting individual companies can result in price movements independent of their industry peers.
Industries vs. Sectors
Both industries and sectors are classification systems, but sectors are broader. For example, the retail trade sector includes various industries like health and personal care stores and clothing stores. A company can belong to multiple sectors or industries based on its diverse business operations.
For example, Rite Aid Corporation—classified within the health and personal care stores—also resides in the personal services sector due to its involvement in photo development.
Global Industry Classification Standard (GICS)
The Global Industry Classification Standard (GICS) categorizes every public company into a sector and an industry group. Developed by Morgan Stanley Capital International (MSCI) and Standard & Poor’s (S&P) in 1999, it comprises 11 sectors, which are divided into 24 industry groups, 69 industries, and 158 sub-industries.
Example of an Industry
The NAICS identifies ‘Finance and Insurance’ as a top-level sector, which includes a variety of industries such as credit intermediaries and insurance carriers. Commercial Banking, with its NAICS code 522110, serves as a specific industry within this sector.
Industry vs. Sector vs. Business
A sector is a broader classification than an industry. On the contrary, a single business can operate within an industry. When multiple businesses share similar operational methods and outputs, they are grouped within the same industry.
How Many Different Industries Are There?
The NAICS categorizes businesses into 20 sectors, 100 subsectors, and over 1,000 industries. On the other hand, systems like the GICS provide different but equally thorough classifications.
Conclusion
Understanding the concept of industry is vital for business and investment strategies. Industries group similar companies, which tend to react similarly to economic trends. Popular classification systems like the NAICS and GICS help streamline the categorization process, providing valuable insights for investors and economists.
Related Terms: sector, business activities, revenue, economist, market sentiment, macroeconomic factors
References
- The United States Census Bureau. “North American Industry Classification System”.
- National Association of Insurance Commissioners. “NAICS Profile Page: Gap Inc”.
- National Association of Insurance Commissioners. “NAICS Profile Page: Rite Aid Corporation”.
- United States Census Bureau. “North American Industry Classification System”.
- Office of Management and Budget. “North American Industry Classification System”.
- Global Industry Classification Standard. “MSCI Barra: Frequently Asked Questions About GICS”, Page 1.
- MSCI Inc. “The Global Industry Classification Standard (GICS®)”.
