Two of the more common business terms you may hear are “sector” and “industry.” They are often used to describe the same thing, but they’re not actually the same. Within the world of business and finance each one has a precise – and distinct – meaning and one shouldn’t be confused with the other. If you are brushing up on your economic know-how, here’s a rundown on the difference between sector and industry. Consider working with a financial advisor as you sharpen your insights into financial markets.
Sector vs. Industry: Explained
It is common for people to use the terms sector and industry interchangeably. Often, they use either one to describe the same meaning: a cluster of companies working in the same business sphere. But using them like this ignores the nuance. While the two words do have their similarities, they don’t actually mean the same thing. Instead, both have a unique definition that helps further define the economy.
The word sector refers to a larger or more general area, whereas industry focuses in on a more specific subsection. While it’s not the end of the world to use the two in the same context, it’s better to sharpen up your vocabulary.
Sector is the more general term and broadly classifies various kinds of economic activity. It’s a larger portion of the economy that multiple companies operate within. You can get more specific by looking at the varying sub-sectors and industries acting in a sector. Morgan Stanley Capital International (MSCI) and Standard & Poor’s (S&P) created the Global Industry Classification Standard (GICS) to help identify the various sectors in our economy.
It is now the leading standard with 11 sectors used for sector breakdown reporting:
- Communication Services
- Consumer Discretionary
- Consumer Staples
- Information Technology
- Real Estate
Industry is a more specific classification than sector. It categorizes businesses within each sector by their shared business practices and area of focus. GICS list 24 industry groups, including banks, insurance, retailing and transportation.
Some industry groups are in both sector and industry categories, including energy, materials, real estate and utilities. Also, it’s possible for different sectors to have a varying number of industries. For example, the S&P indices put two industries under the energy sector, called Energy Equipment & Services and Oil, Gas & Consumable Fuels. In contrast, the materials sector has five industries: Chemicals, Construction Materials, Containers & Packaging, Metals & Mining and Paper & Forest Products.
You can break these industries down into even more specific categories as well. The financial sector houses the insurance industry, which splits into subsections like home and auto.
Sector vs. Industry: Key Considerations
While anyone should familiarize themselves with the basic breakdown of our economy, understanding this information is vital for investors in particular. For traders, keeping up with both sector and industry analysis can help you decide your next step. Using sector analysis, an investor can assess the present status and future condition of any given sector in the economy. That provides insight into the performance of a group of companies. A trader can use that knowledge to decide whether investing in that area will be profitable for them.
The other tool at your disposal is industry analysis. A company can use industry analysis to help it see where it stands in comparison to other companies in that specific sphere. Essentially, it’s a comparison tool for corporations that provide similar services or products. It consists of various data points, such as supply and demand, the factors impacting those numbers and more.
Oftentimes companies in the same industry tend to behave alike. They’re under the same market and influences, so you will typically see their stocks affected in a similar manner. Investors need to investigate the relationship between the trends that impact industries and their performance as a result. That may involve researching a historical precedent or studying future projections as certain spheres of business grow. That will reveal patterns which the investor can use to inform their trades in the short-term and long-term future, depending on their goals.
The terms sector and industry are commonplace, but they are not always used in the right context. While that is not a problem in casual conversation, knowing the correct distinctions is vital for any investor. For them, their strategy and financial goals depend on having the right tools and information to make wise decisions. Knowing the differences between sector and industry may help you decide where to allocate your funds in the future.
Tips for Investors
- If you want to strengthen your investing, consider talking to a financial advisor. They can help you find ways to improve. With SmartAsset’s free matching tool, you don’t have to go far to find one. In minutes, it matches you with local advisors ready to help you achieve your financial goals. If you’re ready, get started now.
- Use this asset allocation tool as you weigh your risk tolerance against various combinations of large-cap, mid-cap and small-cap shares.
Photo credit: ©iStock.com/iQoncept, ©iStock.com/chombosan, ©iStock.com/ronstik