Industry vs. Sector: An Overview
Although some may think of them as the same, the terms "industry" and "sector" have different meanings. Industry refers to a specific group of similar types of companies, while sector describes a large segment of the economy. In the stock market, the generally accepted terminology cites a sector as a broad classification and an industry as a more narrow one.
Industry and sector are often used interchangeably. Or, the two terms are sometimes reversed.
However, a sector refers to a broad economic segment that contains industries while an industry falls within a sector and breaks down according to more specific companies and business activities.
- Industry refers to a group of companies that operate in a similar business sphere, and its categorization is narrow.
- Sector refers to a part of the economy into which various industries consisting of a great number of companies can be fit, and is larger in comparison.
- Investors often compare companies within the same industry for investment opportunities.
- Stocks of companies in the same industry will usually trade in the same direction, as their fundamentals can be affected by market factors in the same way.
- There are four types of sector groupings in the economy: primary, secondary, tertiary, and quaternary.
What's The Difference Between Industry And Sector?
Industry refers to a specific group of companies that operate in a similar business sphere and have similar business activities. Industries are created by breaking down sectors into more defined groupings. Therefore, an industry is a subcategory of a sector.
Examples of industries include banks, asset management companies, insurance companies, and brokerages. Companies that fall into the same industry offer similar products or services and compete for customers who require them. For instance, banks will compete with one another for customers who require checking and savings accounts. Asset management firms compete for investment clients.
Industries can be further categorized into more specific groups. For example, the insurance industry can be broken up into different, specialized divisions like home, auto, life, malpractice, and corporate insurance.
When choosing an investment opportunity, an investor may find it more advantageous to compare different companies within the same industry. They'd be comparing apples-to-apples since the companies may share the same or similar production processes, customer type, financial reporting, or responsiveness to policy changes.
Moreover, the stocks of companies within the same industry will typically see price moves in the same direction for the same basic reason: they're affected by the same (or similar) factors, including market changes. So, for example, within the healthcare sector, the stocks in the healthcare provider and services industry may respond in the same way when decisions about the Affordable Care Act (ACA) are made in Washington, D.C.
The North American Industry Classification System (NAICS) facilitates the straightforward comparison of statistics of business activity across North America.
A sector is a general segment of the economy that contains similar industries. An economy can be broken down into about a dozen sectors which can describe nearly all of the business activity in that economy. Economists can obtain an understanding of the economy by looking at each sector.
There are four types of sector groupings in the U.S. economy:
- Primary Sector: This grouping deals with the extraction and harvesting of natural resources such as agriculture and mining.
- Secondary Sector: This grouping pertains to construction, manufacturing, and processing. Its sectors relate to the production of finished goods from raw materials.
- Tertiary Sector: Retail; arts, entertainment, and recreation; financial; transportation; and communications are among the sectors that fall in this grouping. Companies in the tertiary sector provide services to the primary and secondary sectors as well as to consumers.
- Quaternary Sector: This sector grouping deals with knowledge or intellectual pursuits including and education.
The economy's basic materials sector includes companies that deal with the exploration, processing, and selling of basic materials such as gold, silver, or aluminum. These materials are then used by other sectors of the economy. This is a primary sector.
Transportation is another sector of the economy. This sector includes automobile manufacturing, train, trucking, and airline industries. It is a tertiary sector.
Specific exchange traded funds (ETFs) may track particular sectors. One such ETF is the Energy Select Sector SPDRFund.
Investors can use sectors as a way to categorize the stocks in which they invest, such as telecommunications, transport, healthcare, and financials. Each sector comes with its own characteristics and risks.
Use in Financial Analysis
When evaluating companies, it is more prudent to evaluate those within an industry than those throughout a sector. This is so because, as noted above, each sector has many different industries.
For example, the transportation and warehousing sector includes a variety of industries relating to different types of transport, including air transportation. But if you wished to compare companies that build planes, such as Boeing and Airbus, it would be best to look at the aerospace industry within this sector, and not the sector as a whole.
Though all of the companies in the sector could be affected by similar factors, they have completely different purposes, capital expenditures, cash flows, operating margins, and so on.
Therefore, when utilizing financial ratios to compare one company to the next, again, look at companies in the same industry. In other words, compare Boeing to Airbus as opposed to an airline catering service.
- An industry groups similar companies together. It exists as a subset of a particular sector.
- As an economic component, an industry is smaller than a sector.
- An industry can grow or otherwise shift with time. As innovations emerge, an industry could become obsolete and disappear.
- Industries are classified according to the products and services that the companies within them offer.
- As a subset of a sector, and representing such specific economic contributors, industries rank lowest in the economic order.
- An analysis of an industry provides a drilled-down view of companies and their performances, as well as the performance of the industry.
- Industry oversight can be straightforward and strictly enforced because of the limited, well-defined business types and activities.
- A sector groups various and similar industries together.
- A sector represents a larger swath of the economy than an industry because it can contain thousands of industries.
- Due to their broader scope, sectors are typically more stable than industries, especially the secondary and tertiary types (because of their essential industries).
- Sectors are classified broadly according to common business practices among industries.
- In the overall economic order, sectors rank second because they contain all economic contributors.
- An analysis of a sector provides a higher level view of the economy compared to the view offered by an industry.
- Sector oversight is more relaxed or general due to the huge number of industries that sectors contain, and the oversight already in place for industries.
|Quick Reference Comparison|
|Defined||Groups similar companies||Groups similar industries|
|Breadth||Contains many companies||Contains thousands of industries|
|Change Potential||May grow or shrink over time||Normally, remains stable due to broader diversification|
|Classification||According to products and services of companies||According to commonalities among industries|
|Ranking||Last in the economic order||Second in the economic order|
|Analysis||Targeted view of companies' details and performances||Higher level view of industries' performances|
|Gov't Oversight||Stricter enforcement possible due to limited business types and activities||Less involved due to large number of industries and existing industry oversight|
Which is Bigger, an Industry or a Sector
A sector is the larger of the two. It can group thousands of industries together. An industry groups similar companies.
Is Manufacturing a Sector or an Industry?
Manufacturing is a sector. It contains companies that mechanically, physically, or chemically change materials, substances, or components into different products.
Who Classifies Industries and Why?
The U.S. government uses the North American Industry Classification System (NAICS) to classify industries. It does so in order to gather, analyze, and report a range of data about the U.S. economy.
The Bottom Line
Industry vs. sector. The two terms are often used interchangeably but they have distinct meanings that are important to investors, analysts, and the federal government.
An industry represents a group of similar business establishments. It is a subset of the larger sector. A sector groups industries, based on their commonalities and according to the sector type into which their business practices fit (primary, secondary, tertiary, or quaternary).
Grouping companies into specific categories that reflect their similarities allows for a more effective view and comparison of their functions, operating activities, and business results.
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