Are you worried about your financial health in future? Are you not satisfied with the returns on investment promised by companies and investment tools that you have chosen to invest your money? If yes, then you are not alone. There are millions of men and women who remain worried with the safety and security of their money locked up in various investment schemes. You never know what is going to happen in future but it pays to choose the companies for your investment wisely after making a careful analysis of their track record and fundamentals.
There is a method called SWOT analysis that is becoming very popular among investors these days. SWOT is an acronym that stands for Strength, Weakness, Opportunities, and Threats. Analysis of strength, weaknesses, opportunities, and threats are usually common in businesses and marketing parlance but it has become the buzzword among investors these days.
A tool not just for business managers
SWOT analysis is a very handy tool that can be used by investors to know in-depth details about a company he is interested in investing into. This means you can know your real prospects before investing your money in the stocks of a company listed in the stock market or into an investment scheme introduced by the same company. But this tool is equally effective in case you have already made an investment in a company or its investment vehicle. Applying SWOT analysis to a company gives you a clear picture of the advantages and disadvantages of investing in the company.
Better investment decisions that reduce losses and increase profits
Whether a company is worthy of investment with your hard earned money cannot be said with certainty solely based upon its advertisements, tall claims, brand ambassador’s image. It is a make believe world and you must guard your money so that it not only remains safe but also increases quickly to beat the inflationary forces. This requires checking the fundamentals of the company and carrying out its SWOT analysis to know the current position of the company and where it is likely to be in a few years’ time. Once you are aware of the real situation inside the company, you are more likely to take a correct decision regarding your investment. Most investors take decisions to invest money in an investment scheme or company on their impulse. Their decision is influenced to a great degree by the advice given to them by their friends and relatives and also by what the brand ambassador of the company promises on television and print media. But once you have carried out SWOT analysis, you will not require any outside help to take your decision to invest in a particular company. This is because the picture will become absolutely clear and you will know the direction in which you need to move.
Understanding the components that make up SWOT
Out of the 4 components of SWOT, strengths and weaknesses reflect the present situation of the company whereas threats and opportunities talk about the situations in future.
As the name implies, strengths of a company are all those aspects that place it in an above average position in comparison with its competitors. You know the parameters where the company is doing well. But what is important is that you also get to know how or what makes the company do well on these parameters. If the product or service of a company is very popular, it is considered a strength of the company. But what matters ultimately is the reason behind this popularity. Whether it is superior quality or the company is making use of a superior technology or manufacturing process that decides the strength factor for the investor.
Weakness of a company is its below average performance in all aspects that are important for the investor. These are the aspects that show the vulnerabilities of the company in comparison with its competitors. Poor labor condition, product that is more or less a commodity, inferior quality raw materials etc are some of the weaknesses of the company. Even a situation where the company is facing tough competition from other companies can be considered a weakness of the company.
If there are chances that the company could significantly improve its performance in future, it is treated as its opportunity. Restructuring or re jig of the management, introduction of a new product or service, availability of latest technology etc are some of the scenarios that speak volumes about opportunities for the company.
Threats are anxieties that could turn worse in future. Even though these are theoretical in nature, they should not be discounted when evaluating the prospects of a company. These are scenarios that can lead to failure or poor performance by the company. If there is a chance that a rival may emerge in near future, it is considered a threat for the company.
Limitations as a tool to evaluate a company
Even though SWOT analysis has become very popular and it does help the investors significantly, cutting down their risks and increasing their income earning potential, there are many people who feel that there are inherent limitations in it. They say that it ignores the financial fundamentals while evaluating the prospects of a company and it is subjective and judgmental in nature. These experts feel that an optimist will feel good with opportunities while a pessimist will make a mountain of even very small threats to lower the overall prospects after SWOT analysis. It is a fact that same SWOT analysis may produce different results of the same company when done by a bear and a bull.
Without a doubt, SWOT analysis is a great tool in the hands of a common investor who is facing a dilemma before taking a decision whether to invest in a particular company or not. This tool at least helps in clearing the picture about the company as well as the thought process of the investor that is greatly influenced by the advice of friends and promotions done by a celebrity. This is a big help in itself as it prevents the investor in taking any decision in haste and on impulse. The investor is able to learn about the present condition of the company as well as its opportunities and threats that may arise in near future. All this information helps in erasing notions about the company that are doing rounds because of all the material that he has read or seen in newspapers, television, and internet.
Remember that SWOT will not tell if a stock is undervalued or available at a fair price. If you begin SWOT analysis and remain consistent with it, you will find that you are in a better position to make a neutral and sound comparison between several companies. After years of using this wonderful; investment tool, many investors have found that they have been able to considerably wipe out their errors in taking investment decisions. This tool has made a qualitative difference in the mindset of the investors while at the same time helping them in securing much better profits from their investments.