Why is it important to understand the competitive position of a product of a company before purchasing  the shares of the company?

Expert Answers
Ashley Kannan eNotes educator| Certified Educator

I would simply say that in order to make a wise investment, one needs to know in what they are investing.  When buying stock, it is important to know the competitive position of a company and their products so that future decisions can be made.  For example, will there be future purchasing of stock in larger volume or quantity?  Is there an significant growth potential to the company in terms of their products?  These are but a few of the questions that have to be assessed before purchasing stock.  Part of knowing this comes from the fact that everyone involved in the game of investment and venture capital analysis is there to make money for themselves.  This self interest sometimes preclude full disclosure.  For example, stock brokers are thrilled to facilitate a sale of a large volume of stock.  They might assert that they would like to see you, as the investor, make a pot of money.  However, in the end, they are not going to cover the losses nor will they explain to one's spouse how Junior's college fund just disappeared as a company declared bankruptcy.  I seem to be in a movie suggesting mood, but I would suggest that you watch the film, "Boiler Room" for a great depiction of how painful this world can be.  Had Harry Renard done some level of homework in understanding the competitive position of FarrowTech, he might not have wound up in the pathetic position he did having been manipulated by Seth.

krishna-agrawala | Student

When we purchase the shares of the company it is important to compare the market price of the shares with the current and future expected performance of the company. Shares of a company that is currently earning good profit are more valuable. But the current performance or profit of a company is not sufficient indicator of the value of company's share. The future expected performance of a company, in terms of its profit margin and total profit, are important determinants of true value of its shares. Understanding the competitive position of a company enables an investor to make a better assessment of the future performance of the company and therefore value of its share. Therefore, it is important to understand the competitive position of a product of a company before purchasing its shares.