Industry Analysis

Once the stock analyst has identified the stock market that is attractive for investing in, the analyst will need to identify the industries that are attractive within the stock market. This calls for an industry analysis. This industry analysis is not the same as the 'Industry Structure Analysis' or the five force industry analysis but is more indepth. The five force analysis or the Industry Structure Analysis is merely part of the overall industry analyst the real stock analyst must perform.

In each stock market, there are industries that are more attractive than others. Within each industry, there are stocks and investments that are more profitable than others. So, each step of stock analysis including industry analysis and stock market analysis is very important.

Why is it important to find attractive industries within the stockmarket?

Industry analysis is important because the overall strong stockmarket performance does not preclude some industries from performing better than others. To assess the industry performance, however, different risk levels will need to be considered. Some industries are riskier than others. These risky industries need higher rates of return to compensate the investors for taking on the higher risks. For stock analysts, forecasting expected returns is not enough, they need to adjust the level of risks as well.

Some factors to consider when doing industry analysis

• strikes

• export and import quotas

• government regulation

• availability of key resources affecting the supply curve for the industry

• expected shifts in the demand curve for the product

• the responsiveness of the industry to the business cycle. For example, cyclical companies will exaggerate the boom and bust of the cycle, whereas non cyclical companies such as food retail companies will be less affected by the boom and bust conditions.

• International exposure. Companies which compete internationally will be more affected by changes in exchange rates and overseas economies.