How Industry Analysis Helps You Identify the Right Investments
Understanding a company’s position is a vital factor for setting out an effective trading strategy. And industry analysis helps you understand a company’s position related to other companies that provide similar services or products.
Let’s go through this post and get insights into industry analysis and ensure how it helps you identify a better investment opportunity. This post is also helpful for those pursuing online trading education.
Before beginning, have a look at these two terms:
- Industry – Industry is a group of establishments dealing with similar services or products. For instance, some of the significant players in the global heavy truck industry are Tata Motors, Volvo, Ashok Leyland, Paccar, Daimler AG. These companies manufacture large commercial vehicles for the on-highway truck market.
Likewise, big ajor companies in the global automobile industry are Maruti Suzuki, Toyota, Volkswagen, General Motors, Honda, Ford, Hyundai, etc. These companies make light vehicles that are close substitutes for one another.
- Sector – A sector is a group of similar industries. To take an example, healthcare sector contains several related industries, such as biotechnology, pharmaceutical, medical supply, etc. A majority of the company’s revenues or earnings is derived from its major business activity.
The purpose of industry analysis is to search for industries that can offer you the highest potential for investment returns on a risk-adjusted basis.
As an investor, you need to understand relationships between industries and a range of economic and business variables. Also, use a number of approaches for reliable and practical industry predictions. Checking the selected industry’s past trends, future outlook and demand-supply mechanics is another critical task.
Besides, you should examine industry performance based on other industries (especially their superior or inferior returns) and determine their degree of consistency, stability, and risk in the profits in the industry.
Choosing Correct Sector
An industry has sub-parts. For example, when looking out for the chemical industry, you’ll find fertilizers, petrochemicals, pharmaceuticals, polymer, dyes, varnishes, etc. That’s because they are some of the sectors in this industry. It’s, therefore, essential to stay focused on identifying the right sector. Without this, making an accurate industry analysis is not possible.
First, take up an industry and then find out the relevant sectors. Choose a sector which is doing well, and its prospects are good. Furthermore, it is useful to look at the different market segments in a specific sector.
Five Forces Analysis
Michael Porter propounded the concept of five forces analysis. These forces are an integral part of any industry. They include three forces from ‘horizontal’ competition. They are
- The threat of substitute products or services
- The threat of established rivals
- The threat of new entrants-
Two other models include ‘vertical’ competition:
- The bargaining power of suppliers
- The bargaining power of customers.
Under this mode, you should study the competitive scenario of a company that is using these five parameters to see the competitive landscape.
An industry analysis means just understanding the particular industry on a micro level. But, it is necessary to use factors that can influence the industry at the macro level. The macro-level factors include innovation in the industry, recent industrial developments, legal and regulatory framework, etc.
Look at Current literature
For a successful investment in the stock market, it’s essential to skip over reading all the available relevant industry reports and statistics to ensure whether it is worth reading further on the specific industry.
Go through some of the real analysis that has in-depth information and detailed review so that you don’t feel the need for new industry analysis. But do remember not to depend just on the existing industry analysis reports. Reason being, the stock market is volatile, and industry factors keep on changing constantly.
So, be sure whether or not you are checking the most recent report on that basis. Based on the report, envisage its relevance in the current market.
The bottom line is that many other approaches are available in the market to conduct industry analysis. However, the above steps are of paramount importance and useful to understand a company’s business and business environment and dentine active equity investment opportunities.