Getting into the nitty-gritty terminology of the financial world can get complicated quickly. Trying to keep straight all of the categories, reports, and other variables confuses even the most experienced financial professionals, so don’t feel too bad if you’re using the wrong terms here and there.
Two of the most often swapped terms are Sector and Industry, which is understandable. While they’re related, they’re not the same as they both have specific situations where they can be used. So in this article, we’re going to break down the definitions for both of these terms and give you a breakdown of the key differences. If you’re interested in doing a deeper dive, we’ve got a great resource below that will help expand your financial education.
What is a Sector?
Imagine that the entire economy is a pie. Sectors would be slices of the economic pie. Essentially, a sector is a section of the economy under which similar groups of businesses, services, or products are housed.
Sectors are given a broad scope for which they can be defined. However, the one “rule,” if you like, is that a sector encompasses all businesses involved in the same activity. Categories like agriculture, manufacturing, and education would all be considered sectors.
Sectors are the result of clustering different yet related industries together. There are four sectors of an economy which are then broken into different sub-categories:
- Primary Sector – agriculture, mining, forestry. Any business that focuses on the extraction of raw materials like precious metals or timber would be in this sector.
- Secondary Sector – manufacturing, construction, and other companies involved in the production of finished goods from raw materials.
- Tertiary Sector – Companies that are predominantly service-based are in this Sector. Entertainment, retail, financial, and transportation are all in this sector.
- Quaternary Sector – Companies involved in scholarly pursuits are put into this sector. Businesses focused on education, research and development, and consulting are considered to be quaternary.
What is an Industry?
Industry, however, is more niche-related. Unlike sectors that rely on activities to categorize themselves, industries rely on processes.
In this case, “processes” mean the businesses are all involved in generating the same end result. So if you’re running a hard money loan business that loans money out to real estate investors, you’d be considered to be part of the banking industry. If, however, you run a cupcake shop, you’d be categorized into a different industry like food or retail.
Industries can also be further sub-categorized down into different groups. For the banking industry, there could be sub-categories based on the financial products offered or the type of customers they serve.
If you’re curious which industries are currently recognized, the North American Industry Classification System (NAICS) is an extensive list that adjusts based on clustering trends of the economy.
The Key Differences Between Industries and Sectors
Understanding the difference between Industry and Sector can get overwhelming, so we’ve broken down a few key features of each to help give you a better idea of how each is defined:
- Sectors are broad while industries are narrow.
- Sectors relate to business activity, while industries involve a specific process.
- Industry relates to a group of companies, while sector defines a conglomerate of related industries.
- Business processes are categorized by Industry, while business activities are classified as Sectors.
- Businesses can be categorized into multiple industries but are typically listed in only one sector.
- There are around a dozen sectors of the U.S. economy while there are thousands of industries.
A good way to think about this is by looking at the most significant categories for the U.S. economy. One of the biggest, finances, would be listed as a Sector. Within the financial sector are several industries, including insurance, regional banks, collections agencies, or other categories that can further niche all of the parts that fall under finances.
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