Editor's note: Ask TheStreet is designed to answer questions about the market, terms, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment- or stock-related advice.
I've read a lot about the importance of sector analysis and industry analysis. Just when I think I have a grasp on which is which, I end up back at square one. Can you let me in on what distinguishes the two, an industry and a sector? -- M.S.
In the investing world, the grouping of stocks into industries and sectors is one of the most popular ways of categorizing them. The idea is this: It's a lot easier to compare the performance of two companies in the same field, which perform similar business functions, than to compare the performance of two unrelated companies. These fields -- which are known to investors as industries or sectors -- are essentially just classifications that can help us isolate stocks that are of specific interest.
Which Is Which?
So what exactly makes the two classifications different? Not as much as you might think. These days, they're reasonably analogous. The purists will tell you that the difference between an industry and a sector basically boils down to scope. Generally, a sector is considered to be the broader of the two. Sectors slice the economy into big chunks -- each of which is home to multiple industries.
Here's the kicker, though: The two terms are sometimes reversed. Fundamentally, the best way to keep things straight is by looking at the context in which the word is used. If the word "industry" or "sector" is being used by itself, then it's generally safe to take either word to mean the same thing.
As if the lack of a strict definition weren't enough, the way the industries and sectors themselves are defined in the real world could fall within any of a number of industry classification schemes. That said, measures do exist for what constitutes an industry or sector.