Understanding the difference between "industry" and "sector" is essential for grasping how economies are structured, especially when it comes to investing in the share market.
Definitions
SECTOR :
A sector is a broader classification of the economy that groups together industries that share similar characteristics. Sectors represent a large segment of the economy and encompass multiple industries that serve a common purpose or function. For example, the Technology Sector includes various industries related to technology, such as software, hardware, and telecommunications.
Industry:
An industry is a more specific classification within a sector that refers to a group of companies that produce similar products or services. For example, within the Technology Sector, you have the Software Industry, which focuses on companies that create software solutions, and the Hardware Industry, which deals with computer hardware.
Key Difference
Scope:
Sector: Broad and encompasses multiple industries (e.g., Financial Sector).
Industry: Narrower and focuses on specific companies within a sector (e.g., Investment Banking Industry).
Examples:
Sector Example:
Health Care Sector includes industries like pharmaceuticals, biotechnology, and medical devices.
Industry Example:
Pharmaceutical Industry focuses on companies that discover, develop, and manufacture drugs.
Types of Sectors and Industries
Sectors:
Primary Sector: Involves the extraction and harvesting of natural resources (e.g., agriculture, mining).
Secondary Sector: Focuses on manufacturing and processing (e.g., automotive, textiles).
Tertiary Sector: Involves services rather than goods (e.g., retail, banking).
Quaternary Sector: Knowledge-based services such as information technology, research, and education.
Quinary Sector: Involves high-level decision making and services (e.g., non-profit organizations, education).
Industries:
Each sector can be broken down into multiple industries. For example:
Technology Sector: Software, Hardware, Telecommunications.
Financial Sector: Banking, Insurance, Asset Management.
Role in the Share Market
Investment Decisions:
Investors often look at sectors and industries to diversify their portfolios. For instance, during a downturn in the technology sector, investors might shift their focus to more stable sectors like consumer staples.
Market Analysis:
Analysts often assess sector performance to predict market trends. A booming sector may indicate economic growth, while a declining sector may raise red flags.
Risk Management:
Understanding sectors and industries helps investors assess risk. Some sectors may be more volatile than others. For example, the energy sector may experience more fluctuations due to geopolitical events than the healthcare sector.
Sector Rotation:
Investors might engage in sector rotation, moving investments from one sector to another based on economic cycles. For example, during a recession, investors may favor defensive sectors like utilities over cyclical sectors like consumer discretionary.
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.
Conclusion
Quick Reference Comparison | ||
| Industry | Sector |
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 |
Both sectors and industries play a vital role in the share market, providing structure to economic activities and helping investors make informed decisions. Understanding these classifications allows investors to analyze market trends, manage risk, and create diversified portfolios effectively.
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