When you
are investing, you try to find the best companies to invest in. Aside from
technical analysis and fundamental analysis, you may also have to use other
approaches to the market. You may try to do some extensive SWOT analysis.
Doing SWOT
analysis isn’t as easy as it sounds. We all know it stands for Strength,
Weakness, Opportunities, and Threats. And we understand those words by
themselves.
But how do
we exactly do SWOT analysis for an investment? Let’s dig deep into each of the
elements of SWOT analysis.
Strengths
The strengths
of a company are generally the first things that would catch your attention
when you’re searching for a nice company to invest in.
A company can
be considered strong if its balance sheet shows good figures. Or if its stock’s
price movements continue a clear, attention-grabbing uptrend, it can also be
deemed strong.
But the
thing you want to specifically look for is the company’s strengths at:
·
Management
·
Products
or services
·
Margins
·
Customers
The company
should have a strong management, including its people, the employees, etc. Its
products and services should also have superior quality. Then look at the
margins of the company. Its financial statements are very important to look at.
Lastly, the company should also have a strong, loyal customer base.
If the
company meets all those criteria, you can consider it strong. But don’t forget
to compare it against the remaining elements.
Weakness
Sometimes,
looking for a good company’s weakness is very difficult, especially if the
company is very well-known. This is because it’s expected for companies to work
hard and show only the company’s strengths.
Knowing the
company’s weaknesses can give you hints to the potential downfalls or shortcomings
of the company.
The best place
to look for weaknesses is the company’s annual report. You should also watch
out for the notes to the financial statements in which the company reports
their potential liabilities. It would also tell you about potential competition.
Depending on
the niche and market, a company’s weakness may be different from others, even
if the companies basically have the same businesses.
Read further: Business Risk and How It Occurs
Opportunities
This is
also another element that is difficult to look for. This basically refers to the
opportunities that the company has for growth, consequently increasing the
profits that shareholders will get.
There are
times that companies can benefit from huge economic moves, which are very easy
to spot. However, it’s typically more difficult to spot growth opportunities
for many companies.
You may want
to search for new markets or new products that a company may or plans to
develop. Try to look for external growth opportunities like acquisitions and
mergers. Also, be on the lookout for huge, innovative social trends that the
company can capitalize on.
Threats
You should never forget to look for potential threats to
your investments. These things are more than just weaknesses. The threats are
called threats for a reason. Threats, when realized, can cause huge impacts.
Among the most common threats that you should keep an eye on
are litigation, government legislation, and competition.
The notes on the financial statement on the company can be
of great help if searching for the threats that a company may have to face.
Threats can hugely affect a company’s profitability, meaning it could also
greatly diminish the profits you can get.
Read further: Breaking Down Risk Management
Conclusion
SWOT analysis can be of great help when trying to pick
investments. Fused with both fundamental and technical analysis, it can prove
to be your best guide in choosing the your best money-making investments.
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