Stock market investments can reward with returns if invested correctly. The right kind of analysis demands multiple strategies, and SWOT analysis is one method used to understand the fundamentals of stocks correctly. This method analyses stock from multiple viewpoints and can help an investor to make informed decisions.
This article covers the meaning of SWOT analysis, its components, and why and how to use SWOT analysis for stocks.
What Is SWOT Analysis?
SWOT analysis aims at analysing a company’s strengths, weaknesses, opportunities and threats, from which the term SWOT has been formed. Out of these four factors, strengths and weaknesses are considered internal factors, i.e., controllable by firms. In contrast, opportunities and threats are external factors and therefore are only partially in firms’ hands.
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Components Of SWOT Analysis For Stocks
Strength
S stands for strengths in SWOT analysis. Strengths are those points where the company excels or qualities that set it superior to its peers. A company can ensure a top position in the industry by focusing on its strength. Brand reputation, higher market share, efficient management, unique technology, healthy financials, cost-effectiveness, etc., can be considered a company’s strengths.
Strengths are particular to products, companies and industries as they may have different key focus areas. For instance, an FMCG company may have a strong distribution network, while a pharmaceutical company may have a patent as a strength.
Weakness
W stands for weaknesses in SWOT analysis. Weaknesses are those areas where the company is falling short or which are preventing it from performing better than competitors, and those weak points may reduce its future growth potential. Non-scalability of business, lower customer retention ratio, outdated technology, poor financials, unpopular brand, inefficient management, etc., can be considered a company’s weaknesses.
Opportunity
O stands for opportunities in SWOT analysis. Opportunities are those areas where the company has a large room for growth and success in the future. A few potential opportunities for the firm include adding new product lines, entering new market segments, mergers and acquisitions, adopting social trends, favourable government regulations, adopting new technology, etc.
Some firms may easily spot and use the opportunity, while some may not. If the firm succeeds in spotting the opportunities, those opportunities may convert into strengths.
Threat
T stands for threats in SWOT analysis. Threats are those external factors that can harm the firm’s growth. Some threats can be competition, substitute products and their demands and pricing, changing trends, unfavourable government regulations, etc. These threats can become the firm’s weakness if not taken care of.
Read More: How To Perform Technical Analysis Of Stocks
Why Use SWOT Analysis For Stocks?
The following uses of SWOT analysis make it essential to conduct it.
- SWOT analysis helps in the fundamental analysis of the stock.
- SWOT analysis of the company helps to understand its strong competitive advantage, which may make the business the leading one in the industry and help it survive for a long time.
- SWOT analysis of stock also helps to understand the minor and major problems of the concerned company, which can significantly harm the future stock price.
- SWOT analysis of stock helps to identify existing big opportunities and threats that can impact stock returns.
How To Do SWOT Analysis Of Stocks To Study Companies?
SWOT analysis is an important tool for comparing two or more companies. Here is how you can do a SWOT analysis of Indian companies.
- Going through the company’s annual report would give you an idea about the financial strengths and weaknesses of the company and some qualitative aspects such as corporate governance, business activities, etc. It also highlights the company’s future plans, showing whether it uses the opportunities.
- Studying the company’s competitors may help you understand where the firm stands.
- Industry reports available online may help you understand the opportunities and threats the firm has.
- The latest news about the firm may indicate the opportunities or threats that can be converted into the company’s strengths or weaknesses.
Final Thoughts
One of the primary advantages of SWOT analysis of companies is that it gives you an idea of all internal and external factors that are either boosting or harming the company’s growth. However, these points represent half a picture. It is also important to analyse the reason behind all strengths, weaknesses, opportunities and threats to make better investment decisions.
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FAQs
It may be challenging to do a SWOT analysis for the entire stock market. SWOT analysis of benchmark indices like NIFTY50 or SENSEX may give you an idea of the entire stock market’s strengths, weaknesses, opportunities and threats.
Market analysis involves assessing the market in a specific industry; SWOT analysis is one of the parts of market analysis.
SWOT analysis assesses not only the risk factor but also the strengths and opportunities of the concerned company.
It is essential to perform a SWOT analysis quarterly or semi-annually to stay updated on any significant changes in the company.
One of the limitations of SWOT analysis is that it only provides the idea of the company’s strengths, weaknesses, opportunities and threats but does not provide the reasons for the same. Plus, it gives a lot of information, some of which might not be useful.
