Questions that you may want to ask when studying investment options. Some answers will be contradictory; the significance of all of them will be relative. But each question will contribute a plus or minus factor to your thinking about the industry you may wish to invest in.
1) What does the industry deal in, necessities or “postponables”? Does it produce things people have to have in good times or bad—food, drugs, power, or heating supplies? Can people put off buying the products to another year or is it something they will need now? Why might these questions be helpful? Well they will help you in determining if it is the right type of stock you are looking to invest in. I know an investor who holds a meat-packing and distillery stocks because of his conviction that, come hell or high water, beef and bourbon will be staples of the American diet.
Now the same question on a different level: Is the industry involved in durable or capital goods, such as locomotives, trucks, freight cars, ships, large buildings? These are expensive items with a long life, and are usually financed with long-term, fixed obligations. In a pinch, these are among the first things customers are prepared to do without.
2)Is the industry depression-resistant? Retail stores, tobacco, metal containers, and food products have a reputation for stability, not only in terms of continuing consumer demand, but also in terms of production costs and price structures which make them attractive as so-called defensive issues.
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3) Does it deal in natural raw materials, such as oil, lumber, asbestos, metals? Stocks of these companies are sometimes considered good hedges against inflation because they represent a primary material, an asset already owned. The acquisition cost of oil underground, for instance, may already have been rationalized; henceforth all that can be inflated are the extraction and distribution costs.
4) What is the competition within the industry? Usually competition is keenest where the differences are least. Automobiles, soaps and detergents, drugs, tobaccos, gasolines and motor oils—within these categories the companies all offer the consumer similar product. The local power and light company, the telephone company, and the natural gas companies are virtually without competition.
Cross-competition between industries is also a factor. This is not the struggle of Coke vs. Pepsi, or Tide vs. All, but whether new office buildings are going to have a skin of brick and mortar, aluminum sheets, or glass panels.
5) What are net earnings now?
6) Where do raw materials come from, a domestic source or abroad? Are prices traditionally stable or volatile?
The question should also be asked in foreign markets: What percentage of income derives from sales abroad? This effects air and shipping lines, export/import industry.
Economic indicators should also be considered when trading Forex.