what is moat: Economic Moat Concept in Evaluating Stocks Complete Guide

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Nokia – At that time had a great moat i.e mobile technology – great barriers to entry but lack of market intelligence and research led to Nokia being wiped off. You have to study the company and its peers in depth to find an economic moat at attractive valuation. For example, Coal India is a good example of economic moat in our markets. It has a clear monopoly in the markets due to entry barriers. It is the ability of a company to maintain its competitive advantage over its competitors. Relying entirely on numbers, he rarely focused on evaluating the qualitative characteristics of the businesses.

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types of moats

Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs. A classic instance of competitive advantage could be referred to as the concept of low-cost advantage –like providing access to low-cost Raw Materials. A classic example is a pharmaceutical company manufacturing drugs for cancer treatment. Most pharmaceutical companies hold on to the patent and become the sole manufacturers of much-needed medicine. This is to inform that, many instances were reported by general public where fraudsters are cheating general public by misusing our brand name Motilal Oswal. The fraudsters are luring the general public to transfer them money by falsely committing attractive brokerage / investment schemes of share market and/or Mutual Funds and/or personal loan facilities.

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In simple words, it is advances received from customers for services or products. It often goes a long way to reduce a company’s dependence on working capital financing. Companies having sustainable cost advantages could look forward to maintaining large market share of the respective industry by leaving out competitors trying to move into the industry. When a company holds a significant competitive edge over its rivals which helps them stay sustainably profitable and protect its share of the market, that company is said to have an economic moat. This edge could be anything from a patent to a brand name. 4) No need to issue cheques by investors while subscribing to IPO.

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Best stock discovery tool with +130 filters, built for fundamental analysis. Profitability, Growth, Valuation, Liquidity, and many more filters. Search Stocks Industry-wise, Export Data For Offline Analysis, Customizable Filters. This helps in customer retention even during difficult times due to customer trust. The one major risk that the business has is the regulatory risk.

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A company with a strong economic moat is more valuable to investors. To develop a strong portfolio, it is advisable to look for companies with economic moats and more importantly, to invest in companies or sectors that you are capable of analyzing. Warren Buffet has defined an economic moat as the structural feature of a company that provides a competitive advantage. This enables the company to generate a high return on capital for extended periods while making it difficult for competitors to be successful. One example of a company with a successful economic moat is the Coca-Cola Company. Being one of the world’s most recognized brands, Coca-Cola products are sold everywhere in the world except Cuba and North Korea.

What is a Moat, and how does it help an investor?

Pay 20% upfront margin of the transaction value to trade in cash market segment. Beyond the financial reports, it is also advisable to observe the overall market sentiment in general. The performance of the company will be better than the overall sector.

A company gets economies of scale when it reaches a particular size. This occurs when a higher number of units of a commodity or service can be produced with lower input costs. Companies with long-term cost advantages can keep a substantial part of their industry’s market by pushing out any new competitors who try to enter. A smart business maintains a balance between price and quality. The term “MOAT” is commonly used in the investment world to describe a competitive advantage.

As for the other companies with a similar offering, they cannot afford to put a price tag as low as the Wal-Marts of the world due to several issues. Reliance has used its end-to-end integration to create a unique advantage. Similarly, Maruti has created a moat in the consumer auto space by its ability to consistently bring new models into the market and cater to almost every segment. On a much smaller scale, companies like Shriram Group have created a wide moat with their unmatched distribution and customer interface across India. D-Mart has created a special moat by taking retailing to the mass market with a cost structure that is hard to match. Wide economic moats offer substantial economic benefits and are expected to endure for a substantial period of time, while narrow moats offer more modest economic benefits which are short-lived.

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For example, Pharmaceutical companies earn millions due to their patent drugs. A good business model and strong fundamentals are all fine and nice, but what differentiates a company from its competitors? When considered in context with a medieval castle, an economic moat helps in providing protection to those inside the castle while protecting their wealth from the intruders. Trade Brains is a Stock market analytics and education service platform in India with a mission to simplify stock market investing.

Strong brand value among the customers is also a type of moat for the company. TTK Prestige is a dominant brand in the pressure cooker segment. The total addressable market is not huge and the effect of this can be seen in the growth in revenues of the company which seems to be plateauing in the last few years. Chandru Kalro is the MD of TTK Prestige – A company mainly into pressure cookers having the highest market share in India in the segment.

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Also, it has led to decreased dependence on raw materials for companies from countries such as China. Wide Moat is those Moats which is possessed by the company for a much longer period. Low-Cost Operating Expenses, Extensive Data, Technology, Patents, High Acquisition/Switching Costs, and Extremely High Entry Barriers are some examples of Moat.

Just like moats around castles that prevented invasions by enemies, economic moats prevent competitors from eating into a company’s profits. Usually, when a business earns a high return on capital, competitors swiftly move in and lower the returns. This phenomenon continues until the return on capital becomes lower than the cost of capital. “In most businesses you see high returns on capital decrease over time as competition comes in. However, there is a very small minority of businesses that enjoy many years of high returns on capital. Other types of intangible assets that can provide a competitive advantage are patents, trade secrets, and intellectual property.

This phase is known as the company’s competitive advantage period, and it can last anything from a few months to many decades. The larger the economic moat, the longer the competitive advantage period. A cost advantage that competitors are unable to match might be a powerful economic moat. Companies with considerable cost advantages can undercut any rival attempting to enter their sector, pushing the competition to quit or at the very least limiting their growth. Naturally, this would result in competition because capital flows to the areas of highest potential return.

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  • For instance, in the steel business, there is no differentiating factor between most players.
  • Companies such as telecommunication and IT often have high switching costs which result in higher customer retention.

This means that the https://1investing.in/ manufactures the raw materials required for the production of its goods. There are several ways by which an economic moat can be created. The higher the benefits for a firm and its stockholders, the longer it may reap profits. A firm with a large moat is likely to be worthwhile to invest in.

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what is moat always need a very strong reason to switch services. If a company can make it tough for its customers to use a competitor’s product, it is a good sign. For example, there was a time when Vodafone enjoyed a huge share of loyal customers. They were one of the leading telecom service providers in India.

This distinct advantage is often difficult to mimic or break through for the peers of the company. A distinctive leadership and corporate climate, albeit difficult to explain, may play a factor in a company’s long-term economic success. If a consumer perceives a product’s price to be too high, they may reject it even if it is of the highest quality. It’s one of the reasons why a low-cost manufacturer outperforms the competition. Companies with a narrow moat outperform those without one . However, in order for a firm to be successful over time, it must create a broad moat.

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