Understand the industry
Next, you need to understand the industry that the company is in. Always ask, is the industry:
- Stable; or
- Declining (on it’s way down)?
Companies in growing industries
Companies in growing industries are usually companies that are selling new products or solutions that you may use. Over the last few years, companies that produce mobile devices and e-commerce companies (like Lazada and Grab) are some examples of companies in growing industries. Growing industries are usually more attractive for you to invest in as these companies have the potential to grow a lot more, which means larger growth for your investment.
Companies in stable industries
An example of a company in a stable industry is Nestle, which makes products like Milo and Maggi. You can find these items in almost every household and even restaurants. This would tell you that their products are in demand and the company should continue to perform well in the long term. So, if you invest in a company in a stable industry, you know that your investment is quite safe.
Companies in declining industries
You should avoid investing in a declining industry. For example, the company Kodak produced films that were used in cameras and used to do very well. But, over the years, digital cameras and phones with built-in cameras became more popular and most people now don’t need to use film for their cameras.