Wednesday, 3 September 2014

A Brief Story Industry Analysis

Before searching for good industry, first we need to know what is a good industry stand for. A good industry usually has two characteristics:

1 Demand increasing and larger than supply (increasing revenue)

When there are higher demands, revenue of the company in the industry will increase together. They also have better price bargaining power with customers since customers are desperately demand for the goods. Higher revenue will cause higher profit.

2 Material input cost decreasing (Improve profit margin)

Every product required input material to process. When the price of material becomes cheaper due to abundant of supply, company can gain more profit with each of products sold. The profit margin of company will increase.

Benefit of company in good industry

1 High probability increases in profit

When a company is inside a good industry, its revenue will increase due to the increasing demand towards that particular industry. Even the small company can gain a larger pie without competing with others since the size of whole pie is increasing. Price war will not happen since there are many potential new customers to search for.

2 Spillover effect

The dragon head in a good industry usually easily spotted by investors. Because it usually will spread many good news and perform good results in financial statements. When its stock price moves higher and higher, investors will start to realise that it is too expensive. Then, investors will start to look for other stocks in the same industry with dragon head  but their stock prices haven't increase much. This spillover effect will cause prices of other penny stocks in the same industry to increase too.

How to search for good industry practically?

1 Logical thinking

Human always prefer to  comfortable, portable, fast life. By logic, you will know digital camera will definitely substitute camera with film, laptop will substitute computer, smart phone will substitute phone, internet will substitute newspaper and so on. There is human nature.

2 Looks for figure

There are many free source of statistics in internet. For example, export of E&E increases 20% last year then you know you will look for E&E industry. Petrol price increases then you will know don’t invest in airline industry. Electric price increases then don’t invest in steel industry.

3 Looks for government policy

Government will announce policy from time to time and this will strongly affect the growth of industry. Such as giving more compensation and subsidies to green technology, tax exemption for E&E export. Stricter rules to beat house price. All of these information give you the clue to select a good industry or at least avoiding bad industry.

I only discuss briefly about industry analysis in this article since the main focus of this blog is on financial report. The teaching of Industry Analysis will in my next blog which is on the way of writing. 

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