An industry is a classification that groups companies that perform similar business activities or produce similar products. Classification systems assign companies to an industry primarily by their largest source(s) of revenue. Industries are often grouped into broader categories called sectors.
Key takeaways
– An industry groups businesses with similar primary activities or products.
– Companies are normally classified by their largest revenue source, even if they operate in multiple lines.
– Industries are useful for comparing companies, analyzing risk and opportunity, and understanding how macro factors affect groups of firms.
– Two widely used classification systems are NAICS (North American Industry Classification System) and GICS (Global Industry Classification Standard).
– Stocks in the same industry often move together but individual-company events can cause divergence.
Understanding an industry
– Basis for classification: production process, primary product or service, and largest revenue source.
– Typical hierarchy: sector (broad) → industry group → industry → sub-industry (granular).
– Examples: Automakers belong to the automobile industry even if they have finance divisions; pharmacies vs clothing stores are different industries within the consumer sector.
Two common classification systems
1. North American Industry Classification System (NAICS)
• Used by U.S., Canada, and Mexico for government statistics.
• Emphasizes production processes and is updated roughly every five years (latest published in 2022).
• Deeply granular: historically ~20 sectors, ~100 subsectors, and over 1,000 six-digit industry codes.
• Example NAICS codes: Rite Aid’s pharmacy operations vs its photo department have different NAICS codes.
2. Global Industry Classification Standard (GICS)
• Developed by MSCI and S&P in 1999 for investment uses.
• Four-tier hierarchy: 11 sectors → 25 industry groups → 74 industries → 163 sub-industries.
• Widely used by investors, index providers, ETFs, analysts, and economists.
Industry vs. sector vs. business
– Sector: broader category grouping multiple related industries (example: consumer goods).
– Industry: narrower grouping of businesses that produce/sell similar products (example: pharmacies and drugstores).
– Business (company): an individual entity that may participate in one or more industries or sectors.
Why industries matter to investors
– Peer comparison: comparing financial ratios and metrics across companies in the same industry gives more meaningful benchmarks.
– Correlated performance: companies in an industry often respond similarly to macro events (commodity costs, regulation, demand shifts), causing correlated stock movements.
– Portfolio construction: investors use sector/industry exposures to manage risk and pursue thematic or cyclical strategies (e.g., sector rotation).
– Investment signals: rising or falling industry rankings can be an early signal to adjust exposure.
What is an example of an industry?
– Commercial banking (NAICS 522110) is a specific industry within the finance and insurance sector.
– Retail sector includes industries such as clothing stores and drugstores; Gap Inc. and Rite Aid are in the same sector but different industries based on their products and services.
Special considerations and caveats
– Multi-line companies: firms with diverse operations may have multiple codes or be assigned to one primary industry despite meaningful revenue from others.
– Classification changes: codes and categories are updated periodically; companies can be reclassified as their business mix evolves.
– Industry heterogeneity: firms within the same industry may still vary widely in margins, market share, geography, and strategy.
– Company-specific events: product launches, scandals, or management changes can cause a stock to diverge from industry trends.
How many industries are there?
– The count varies by classification system. GICS currently defines 74 industries and 163 sub-industries. NAICS provides many hundreds of specific industry codes at the six-digit level. The exact number depends on the level of granularity you choose.
Practical steps — How to use industry classification for investing and analysis
1. Determine a company’s industry and sector
• Check the company’s 10-K or annual report (often lists NAICS or GICS classification).
• Look up the company on financial databases (Bloomberg, Morningstar, S&P Capital IQ) or index provider pages (MSCI, S&P).
• Use government resources (NAICS lookup via U.S. Census) for the official NAICS code.
2. Verify primary business activity
• Review revenue breakdowns in filings to confirm which business line generates the most revenue.
• If revenue is diversified, note secondary industries for risk assessment.
3. Build a peer group
• Select peers assigned to the same industry/sub-industry (not just the same sector).
• Compare financial metrics: revenue growth, gross margin, operating margin, ROE, debt ratios, valuation multiples (P/E, EV/EBITDA).
4. Perform industry health analysis
• Monitor leading indicators: demand trends, commodity prices, input-cost inflation, regulatory changes, technology disruption.
• Track macro factors that typically affect the industry (interest rates for banks, oil prices for energy producers, consumer confidence for retail).
5. Use industry classification in portfolio construction
• Determine target exposure limits by sector/industry to control concentration risk.
• Consider ETFs that track specific GICS or NAICS industry indices for targeted exposure.
6. Watch for red flags and divergence
• Industry rank declines, widening margin compression, or secular demand shifts.
• Company-specific deviation from industry norms (e.g., consistently lower margins or different growth trajectory).
7. Stay current with classification updates
• Review changes when NAICS or GICS methodologies are updated because reclassification can change peer sets.
Practical checklist for analysts and investors
– Identify the company’s GICS and NAICS codes.
– Confirm revenue breakdown and main revenue driver.
– Select a comparable peer group using the same industry level.
– Compare key operating and valuation metrics.
– Evaluate industry drivers and risks (regulatory, input costs, technology).
– Decide on allocation adjustments (increase, decrease, hedge) based on industry outlook and company position.
Important resources (sources)
– Investopedia — “Industry” (Investopedia overview and definitions). Source:
– U.S. Census Bureau / NAICS information and lookup: / and the NAICS profile pages for specific companies (example: Rite Aid, Gap).
– MSCI — GICS FAQ and methodology:
– S&P Dow Jones Indices — GICS methodology and updates (S&P and MSCI jointly maintain GICS).
The bottom line
Industry classification groups businesses by similar activities to help investors and analysts compare companies, assess sector-level risk, and make informed allocation decisions. Use authoritative classification systems (NAICS for government statistics; GICS for investment analysis), confirm a company’s primary revenue drivers, build accurate peer groups, and monitor industry-specific drivers and regulatory changes. Classification is a tool — not a definitive valuation — so combine industry analysis with company-level fundamentals and risk assessment.
Sources
– Investopedia. “Industry.”
– U.S. Census Bureau. North American Industry Classification System (NAICS). /
– MSCI. “Frequently Asked Questions About GICS.”
– S&P Dow Jones Indices. GICS methodology and resources.