What is Market Share?
For every active stock trader or long-term investor, there are things one needs to know while investing. The term “Market Share” is commonly used in the business sector irrespective of any industry. This is an important indicator for investors to understand the company’s strength.
Market Share means a company’s portion of sales for an industry – product category/individual product of a single company. This actually refers to the performance of a firm relatively against its competitors.
How to calculate Market Share?
Market share is calculated as the product of the firm’s sales over the industry’s sales during the specific period. Market share is the driving force within a company that has a compounding effect. The possibility of having too much market share depends on the performance of market segments.
How to evaluate Market Share?
Industries such as insurance, banks, and other financial institutions can’t have a 100% market share as there exists a risk of 100% in the BFSI sector. Hence, capturing the appropriate amount of market share makes these companies of the BFSI sector profitable – unless the occurrence of a major catastrophe.
While evaluating the market share, investors and analysts closely monitor the ups and downs of the markets with the data from their individual independent sources. They analyze the relative competitiveness of the products or services – maintenance of the market share is growing revenues at the same rate as the total market.
Sometimes, a firm collects too much market share and becomes a monopoly in the industry. under such circumstances, it could violate antitrust laws and be ordered to divest assets or take some other action to increase competition.
How to achieve Market Share?
Market Share growth allows the firm to achieve the targets with its operations and improve profits. To achieve the set goals by the firm, along with the improvement in the profitability of market share, companies try to expand by lowering the prices, advertising the existing products and introducing offers and new/different products. In simple words, word of mouth publicity increases revenue without a concomitant increase in marketing expenditure.
For example, assume that ABC Electronics sold INR 5 million in televisions in India, in a total market in which INR 100 million in televisions were sold during the same period. The market share for ABC Electronics is 5 percent. Companies use this number to evaluate their respective strengths in the market with their target buyers.
Key points to remember
Market share calculation = Company’s sales over a period /
Total sales of industry over the same period
Gains or losses in the market share impact the company’s stock performance depending on the market conditions.
While setting up the annual target, no company will compete within the industry with the same target.
Always remember that a profitable company does not necessarily have a large market share in their industry. Market Share is directly proportional to profits. Each firm finds a strategy that works for them, their goals, and organizational situation/constraints depending on their Market Share. So, every investor must refer to the market shares of the firms before investing in the stocks of a company.