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Investing money in financial market? Consider these economic moats before you do it

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The notable aspect of the financial system is regarding Savings and Investment. Investment is to distribute money with the expectation of some advantage in future that is known as “returns”. Investments are assets held by an enterprise to earn income by way of dividends, interests or for any other benefits to the investing enterprise such as Capital appreciation etc. The nature of current investment is readily realizable and is intended to be held for not more than one year from the date of the investment made. The carrying amount of the current investment is the lower of cost or fair market value. Long-term investment, on the other hand, is usually carried at cost.

Economic moats mean to the company’s competitive advantage i.e. the company’s condition to produce and sell its products at a relatively lesser price within a stipulated time to outrun its competitors and to stand above in the market and make a long-term profit. Economic moat actually refers to the deep trench of water around a huge castle to protect it from the invaders. So the investor should consider the economic moats of a company before investing in it. He should be aware of the pros and cons of investment. Caveat emptor still applies when an investor is investing.

A strong economic moat does not allow any other competitor to enter the market and the firm can alone enjoy the power of monopoly. Following are the few economic moats that a firm can undertake to sustain in the market:

  • Pricing

Any tangible or intangible product in the market signifies some kind of values marketed with the sole objective to provide utility to the targeted consumers. This utility when translated into monetary terms is known as pricing. It is simply because of the fact that the homogeneous range of product items carrying the same value would be available at one uniform price. Therefore it is the factor which affects the pricing decision. Thus the price of the product should be cost-effective. The company should curtail its cost in such a way that it provides the best services with the help of cost efficiencies. Economies of scale and a choice between labor-intensive technologies taking into account whether the company is operating in an environment of cheap labor affects the pricing decision. The costing of the product should be such that it benefits both the manufacturer and the consumer.

The company should invest in proper Research and Development work in order to create a good product. It should strategize its policies in such a way that it becomes effective in long-term. New and improved business strategies must be implemented in order to create more unique products and services. The technological development should be such that it becomes difficult for another competitor in the market to adopt it. The product should one of its kinds.

  • Switching Costs

Switching costs refer to the costs that the consumer incurs due to change of brands. It must be strategized in such a way that the existing customer need not change the brand and the new customers should move in and avail the product from the company.

  • Heavy Entry Cost

The cost of entry into the market for new firms should be made so high that new competitors do not enter the market. The initial investment on the entry of the market should be kept in such a way that starting up a business in that industry becomes very difficult. There should be a barrier to entry; only then a company will be able to sustain its position in the existing market.

  • Selling & Distribution Costs

The company should also strategize its selling and distribution policies in such a way that it outruns its competitors present in the market. The distribution channel must be improved and the selling policies and should have a strong distributor channel.

There are many other economic moats that have to be considered. However, it is not necessary that all the firms universally follow the same path.

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