In the case of stock markets before investing in the stocks apart from looking at the company in which one is investing one should also do industry analysis because if one is buying stock without doing industry analysis then it can be compared with buying flat without looking at the building or locality of the building. In order to understand this concept let’s look at industry analysis example –
Suppose an individual has $10000 to invest and he or she thinks that Wal-Mart is good for investment for 3 to 5 years, but before investing money in Wal-Mart investor should do industry analysis. Wal-Mart belongs to retail industry so investor will go on in doing industry analysis of retail industry; following factors should be kept in mind by the investor while doing industry analysis –
- Past of the industry – It is said that past has no relevance when it comes to future but in case of industry analysis past data about industry performance plays vital role because one can see the factors which contributed to industry success in the past and if those factors are likely to remain in the foreseeable future also then one can invest money in the stock as industry level success plays a key part in the performance of the company. So in the above case if the overall retail industry is likely to boom then Wal-Mart will also benefit from this boom.
- Government outlook towards industry – Government plays a major role as far as any industry is concerned so the outlook of government towards the industry in general should also be taken into account, because if the outlook of the government is pro – industry than all policies of government will be targeted towards betterment of industry which in turn will help all the companies operating in the industry and hence investment is recommended in the companies which are operating in the industry.
- Current trends and technology – Another factor which can affect an industry in a big way is technology, just look at what happened to landline phones and watches after the introduction of mobiles or flat television after the introduction of LCD and LED televisions and so on. In the case of Wal-Mart online shopping sites have emerged as a big threat, hence an investor should keep in mind the technology aspect which is likely to affect the retail industry in future before taking any investment decision.
- Elasticity of demand for products – An industry which sell those goods which have inelastic demand is likely to perform well as companies operating in such industries can raise the price of a product without fearing about a reduction in demand from the customer and hence profit margins of companies operating in such industry is good.
- Competitors – One should also look at competitive conditions existing in an industry because if the company operates in such an industry where there are no barriers to entry, too many competitors and cut – throat price competition then a company will find it tough to compete and generate attractive margins for the shareholders. In the case of Wal-Mart such conditions exist as retail market is full of competition and hence investor should keep in mind this factor.
As one can see from the above that industry analysis is of paramount importance as far as investors are concerned because doing only company analysis without industry analysis would be like watching only the trailer of the movie and not watching the entire movie.