Industry vs. Sector — What’s the Difference?
Although industry and sector may sound like they refer to the same thing, they have slightly different meanings when it comes to the stock market. At a high level, sectors refer to divisions of the whole economy, while industries refer to specific groups of businesses within a sector.
What is a Sector?
A sector is a segment of the economy within which a large number of companies can be categorized. Economists tend to create investment views based on sector analysis.
Global Industry Classification Standard (GICS)
The global economy is broken down into 11 different sectors, as defined by the Global Industry Classification Standard (GICS).
GICS is a classification system for assigning companies to a specific economic sector and industry group that best defines its business operations.
Developed jointly by Morgan Stanley Capital International (MSCI) and Standard & Poor (S&P), it’s used by the MSCI indexes, which include US and international stocks, as well as by a large portion of the professional investment management community.
The top of the GICS hierarchy defines 11 economic sectors. These are further divided into 24 industry groups, 68 industries, and 157 sub-industries. The 11 sectors are:
- Consumer Discretionary Sector
- Consumer Staples Sector
- Energy Sector
- Information Technology
- Real Estate
- Communication Services (previously telecommunication)
Companies are assigned GICS categorization codes at the sub-industry levels by S&P and MSCI according to their definition of the company’s principal business.
The Four Parts of Sectors
Outside of sectors divided by similar business activities, sectors of the economy can be broken down into four parts, described below:
- Primary Sector: This sector includes all economic activities related to the extraction and harvesting of natural resources such as agriculture, forestry and mining.
- Secondary Sector: This sector consists of industries focused on the production of finished goods from raw materials including manufacturing, processing and construction industries.
- Tertiary Sector: This is the service sector, which includes courier service, restaurants, tax consulting and financial services.
- Quaternary Sector: The final sector deals with knowledge or intellectual activities including research & development, consulting and education.
What is an Industry?
Industry refers to a specific group of companies that operate in a similar business sphere. Basically, industries are created by breaking down sectors into more defined categories.
For example, the financial sector can be broken down into a number of industries such as banks, asset management companies, life insurance firms or brokerages.
Investment advisors typically have sector-based investment opinions, meaning they may be bullish on one sector and bearish on another based on current economic conditions.
When picking stocks, investors may find it easier to compare different companies within the same industry. That’s because they may share the same production processes, cater to the same customer base, or have similar financial models.
The stocks of companies within the same industry tend to trade in the same direction. This is because companies in the same industry are affected by the same (or similar) factors. For example, healthcare and pharmaceutical stocks may be affected in the same way when decisions around healthcare policy are made in Washington.
At the same time, different industries in the same sector can sometimes behave differently. For example, the industrials sector includes both aerospace as well as homebuilding products, which are influenced by different variables.
All that’s left to differentiate performance is a specific business’s qualities like business model, customer service, quality of the product or service, and so forth. These are good indicators for longer-term projection and performance.
Key Differences between Industry and Sector for Investing
Whereas a sector is a group of industries with a broad scope, an industry is a group of companies with similar characteristics generally providing similar products or services, providing a much narrower scope.
We can consider the hierarchy as follows: economy, sector, and industry.
From an investment standpoint, both sectors and industries can help determine how to invest. Sectors will provide a broad view of trends. There’s more stability in economic sectors. Certain sectors will be more profitable depending on the country and global trends.
When zooming into industries, there can be nuance and confusion that requires more research. This is where investment companies make their bread and butter.
The difference between industry and sector comes down to scope. Sectors have a larger scope, breaking the economy into 11 sectors, while industries have a more restricted scope, focusing on grouping businesses by operations.
Investors utilize sector and industry classifications to determine investment opinions and create diversified investment portfolios.
Understanding sectors and industries within the economy is crucial to analyzing investment decisions within the stock market. People can invest in individual stocks after analyzing industry and sector trends as well as individual company earnings and operations, or they can choose to invest in mutual funds or ETFs organized by sectors.