The Role of SWOT Analysis in Stock Investments

Author: James Clark



Do you want to understand why SWOT analysis should be used for stock investments? We share the role of SWOT analysis in stock investments right here.



One of the best ways to save for retirement and accumulate wealth is through investing, but it's not easy to know which stocks to invest in. There are numerous algorithms, computer programs, and books designed to help investors pick the most lucrative stocks in the market. However, the excessive information available makes it intimidating and overwhelming for new investors to make the right choices when choosing stocks.

It's not easy making your mark as an investor, and finding stocks that will reap long-term rewards is harder than it looks. However, there is one method you can use to analyze stocks and find the best stocks to invest in the market: SWOT analysis.

What is SWOT Analysis?



The simple definition of SWOT analysis is that it is a strategic planning method that has four key points of interest, which are:

• Strengths
• Weaknesses
• Opportunities
• Threats

Every area is individually important, and when used together, it makes for a powerful analytical tool. Investors can use SWOT analysis to decide which company's stocks are the best choice for their investment portfolios. Here's how you can conduct a SWOT analysis for your investments:

Strengths

You must understand the strengths of the company you want to invest in. Most companies have managed to achieve success in their industry by relying on their strengths. The key points you should look at when uncovering the strengths of a company are:

• The management (senior executives and employees)
• Products or services (quality, patents, demand)
• Margins (net profits annually)
• Customers (loyal customer base)

Every market and every company will have its strengths, which is why you can't solely rely on a company's strengths when investing.

Weaknesses

You must identify the weaknesses of a company as they show you the potential pitfalls associated when investing in a company's shares. However, it can be hard to identify a company's weaknesses, as most companies work hard to hide them. An excellent place to find potential weaknesses is to look at the annual report of the company. Potential weaknesses you should look at include:

• Financial strength
• Product liability
• Management/employees
• Continuing innovation

The potential weakness of every company will be different depending on the market.

Opportunities

Investors can find it hard to figure out opportunities, which will essentially be the opportunities a company has to increase profitability for shareholders and grow further. Some of the common opportunities you can look for include:

• External growth opportunities
• Internal growth opportunities
• Social trends
• Macroeconomic trends

The annual report of a company can provide you with a wealth of information related to the opportunities available to a company.

Threats

All investors must identify the threats related directly to their investments. These are more than the company's weaknesses but are items that impact directly and must be considered. Every company faces threats, and potential investors must examine these external factors. Some common threats you should look at include:

• Direct competition
• Government legislation
• Litigation

Reading the company's financial statement should provide you with plenty of insight regarding the potential threats to a company.

Stock Picks



1. Ruths Hospitality Group, Inc. (RUTH)

2. PetroChina Company Limited (PTR)

3. General Motors Company (GM)

Find the top stock picks with guidance on when to sell, buy and further information by subscribing to the PT Premium Service in the Proficient Trader App