There are many methods of analysis employed by different investors in the financial industry. One of the most known and used is the SWOT analysis.
SWOT analysis is not only used in building and examining the progress of a business or organization. It can also be used by individuals in investing or trading. It can be a great tool to apply to long term investing strategies.
Whenever you make any investment decisions about a company, you need to carefully examine the data that the company provides. And you can do that by conducting an analysis.
Let’s break down what SWOT analysis actually is.
What is SWOT Analysis
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats, the four elements of the analysis. They are used to learn more about the company you plan to invest in.
SWOT analysis is a basic framework used to assess the company’s capabilities for both internal and external factors.
It can be used to analyze and determine what aids the company in achieving its goals. Also, it shows what obstacles should the business overcome or minimize in order to achieve desired results. The current position that the company is in and its possible position in the future can be determined as well.
Elements of SWOT Analysis
You should keep in mind that every company and every market will have their own strengths and weaknesses. They will also profit from different opportunities while facing different threats.
Strength: This is used to identify what you excel at, and what the company you chose to invest in has over the competitors.
A lot of companies have become successful over the years by leveraging their strengths. But it’s notable that it’s almost impossible to find a field where you will have no competition. Therefore, it’s up to the company to make sure that they stay on top in their field.
Weakness: This will give you the idea of what could cause the potential downfall of your investment.
It can prove to be hard to find the weaknesses of a company. This is mostly because companies work hard in hiding them and making sure that only their strengths show.
Annual reports can become your best friend when looking for a company’s weakness. Notes to the financial statements can prove to be really helpful in your search. Annual reports contain information about potential liabilities and competition.
Opportunities: This shows possible options for the company to make a meaningful improvement on itself.
Having a new product be introduced to the public can be an opportunity. Restructuring and acquisition also offer opportunities to companies.
It’s also important to examine the company’s demographic and target audiences to know what openings are available for them. It can also provide information about the company’s possible expansion in the future.
Threat: This is more than just knowing what a company’s weaknesses are. You should find out the items that can have direct impact on the company. How economic conditions will affect a company can also turn into a source of threat.
For instance having a company rely too much on one product can be bad for the business. This can also be considered a weakness to the company. Direct threats made to the product’s general market will pose a threat to the business too.
Much like opportunities, threats can be prospective or theoretical but needs to be more specific than a “something might go wrong” situation.
Some direct threats that a company might receive include: increased government regulation, failure to secure approval/acceptance of a major new product, and the introduction of a rival product/service.
Pros and Cons
Just like every type of analysis, there are pros and cons when it comes to using SWOT analysis. You can decide for yourself whether the benefits of using the method are worth overlooking its limitations for.
- You learn more about the company you invest in.
- It’s easier to find out the core strengths and weaknesses of your investment. As well as the opportunities and threats it may face.
- Preparedness for different situations that the company you chose might face.
- Find the perfect time to invest in the company by determining possible opportunities.
- Having a back-up plan prepared in case a threat surfaces.
- Bigger issues are not usually determined through the analysis since the analysis itself tends to be more general.
- No solutions are offered for the information you find.
- Not all information you gather might be useful in making your final decision.
How to Use SWOT Analysis for Personal Finance
As we mentioned before, SWOT analysis is not only used for businesses. You can also use it to determine your own strengths and weaknesses, as well as the opportunities and threats that you stand to face in the financial industry.
The strengths and weaknesses are used to analyze the positive and negative internal factors that can affect a situation. Information found in this part comes from you. These are things that you can directly control, such as your personal money management.
Opportunities and threats on the other hand are positive and negative external factors that can affect your situation. Normally, these are things that are outside your control. But knowing what they are can help you create a solution beforehand.
Knowing these things can be helpful in understanding how your personal choices and behaviors will affect you financially.
SWOT analysis is another tool you can use to analyze your investment. It’s a good way to determine and compile information not only about your investment but also about yourself.
You just have to be honest about your capabilities and accept that you also have weaknesses. You can also work on minimizing the threats you are faced with while maximizing every opportunity.
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