Last Updated on September 27, 2023 by BFSLTeam BFSLTeam
It is crucial for any investor, whether a newbie or an experienced hand, to be better informed about the company in which the investor wants to invest. An important part of this learning is to know about the business model of the company. This is where you must understand the concept of pure play companies. These are publicly listed companies that are invested and focussed in a single line of business, product or service. Read on to have a wider understanding of a pure play company, the benefits of this business model, the associated risks, and why you may want to adopt the pure play method of investing.
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What is a Pure Play Company?
A pure play company is one that focuses on a single line of business – be it a product, a service, or an activity. All of the company’s resources and energy are concentrated on offering a single product or service. Pure play companies typically have limited or no cross-industry exposure. Instead, this line of business is restricted to a single industry, and as a result, the company’s performance is directly and linked with that industry.
In the Indian market, for instance, companies like TCS and Infosys are the pure play software companies. Similarly, Suzlon Energy Limited is a pure play company operating in the renewable energy space.
On the other hand, the exact opposite of a pure play company is a diverse company that offers products and/or services across different industries. Hindustan Unilever is an example of a diverse company, with offerings in the food & beverage, personal care and even home maintenance segments.
The Pure Play Method of Investing
As the name indicates, the pure play method of investing involves purchasing and holding the stocks of pure play companies. Investors may solely focus on such stocks or may allocate a sizable portion of their portfolio to pure play companies. This is the opposite of a diversified investment strategy, which involves purchasing shares of companies across different sectors or industries.
The pure play method, like any investment strategy, is not foolproof. But to truly understand whether or not it is a suitable strategy for you, it’s essential to weigh the risks and rewards of pure play stocks.
Also Read: 6 Steps to Choosing Stocks for Your Portfolio
The Advantages of Investing in Pure Play Stocks
Pure play companies offer some unique advantages to investors. There are many reasons to invest in the stocks of such companies, such as the following.
- Quality Product or Service Offerings
A company that utilizes most or all of its resources for a single line of business is better poised to continuously improve the quality of its core product or service. With their entire financial and managerial capacity backing the single line of business, it is likely that the company may achieve the required level of growth to offer the best-in-class product in the industry, thereby making it an industry leader.
- Industry Correlation
Since pure play companies offer just one product or service, their performance is greatly correlated with the industry’s performance. So, when the industry records a positive uptrend, pure play companies in that market segment may also record exceptional performance levels.
- Easier Stock Analysis
Diverse companies have different streams of revenue and are involved in different industries. So, to evaluate them, you will have to compare their ratios with the benchmarks of different industries. This makes the process quite complicated. Conversely, for pure play companies, analysis is easier and more straightforward.
The Risks of Investing in Pure Play Stocks
On the flip side, the pure play method also carries some risks, including the following:
- An end to industry leadership when a competitor becomes dominant
- Negative performance if the industry witnesses a sustained downtrend
Things to Consider Before Investing in Pure Play Stocks
To ensure that your pure play investment strategy maximizes rewards and minimizes risks, you need to account for the following factors before you purchase pure play stocks:
- The company’s market share
- Its management and leadership
- The company’s competitive advantage
- The financial strength of the company
- The long-term growth potential of the company
- The prevailing level of volatility in the industry
Conclusion
A pure play company is a simple concept and you may already have known many such companies which are focussed on a single product or service. The understanding of this business model and the knowledge of potential benefits and risks associated with it will leave you better informed about making an informed investment decision.
If you do decide to invest in top-performing pure play companies, you can open a demat and trading account with Bajaj Financial Securities Limited to begin your investment journey. In addition to a seamless account opening process, you also get various other benefits like access to different market segments, margin trading facility, access to international stocks and more.
