Several companies with the same type of activity form an industry. There are also industry classifications, which are grouped into sectors.
The main characteristic for company classification is its biggest income source. For example, an automobile manufacturer may have an appliance industry that generates 8-12% of the company's total revenues, but most classification systems would place the company in the automobile industry.
Explanation of an Industry
The main product manufactured or sold is the basis of how businesses are grouped into industries. Economists and investors compare companies in the same industry and study industries to identify factors that affect companies' profits. They explain a similar trend of stock prices of one industry companies by the fact that they face the same obstacles, problems, and victories.
Special features of an Industry
Companies in the same industry are affected by the same macroeconomic factors, so their stocks often rise and fall in the same way. These factors may include changes in response to a certain event or news and changes in a certain industry.
There may be some events within one individual company that affect its stock price without affecting the entire industry (change in management, news scandal, release of a new original product).
Industries vs. sectors
Sectors and industries are classification systems, but the concept of a sector is broader than the concept of an industry.
For example, the same manufacturer can be part of different industries or sectors. The consumer goods sector includes pharmacies, where medicines and health foods can be purchased. It turns out that pharmacies can be classified under the health and personal care products industry and the food industry. One more example, Rite Aid company. It is a part of the consumer products sector and at the same time part of the personal services sector in the photo lab industry.
Industry classification standards
The U.S., Canada and Mexico have cooperatively developed the NAICS (North American Industry Classification System). This is a set of standards for authorities to classify businesses in statistics. According to NAICS rules, companies belong to the same industry if they apply similar production processes. NAICS is revised and corrected every 5 years. The last revision was issued in 2022. It reflects the most accurate classification of companies and industries that have significantly changed since 2017.
In 1999, the GICS (Global Industry Classification Standard) was developed, which is also widely used. It was collaboratively created by MSCI (Morgan Stanley Capital International) and S&P (Standard & Poor's). Their purpose was to create an effective investment tool to evaluate the activities of various industries in detail, classifying them by industry and sector. MSCI indexes, analysts, investors and economists rely on GICS data to compare and find differences between competing companies.
The 4 level GICS hierarchical branch classification system has 11 economic sectors, which belong to 24 industry groups, 69 industries and 158 sub-industries. Each industry has its identification code at all 4 levels. For example, metals, mining, chemicals, forest products and paper, construction materials, packaging and containers are classified as the materials economic sector.